Going global: Investors hungry for more risk are now looking overseas

Emerging-markets equity and bond funds, along with global bond funds, experienced substantial inflows over the last week, an indication that investors are now moving farther out on the risk curve, according to a report from Emerging Portfolio Fund Research Inc. Emerging-markets-equity funds, which have a broad mandate,saw a 39-week high of $2.1 billion in net inflows for the one-week period through last Wednesday, bringing the year-to-date net inflows to $18.2 billion, according to the report. Emerging-markets-bond funds hit a 189-week high of $727 million in net inflows for the one-week period through Wednesday, bringing the year-to-date total to $1 billion, according to EPFR. Global bond funds took in net inflows of $1.87 billion for the week, bringing the year-to-date total to $12.4 billion. “Global and emerging-markets bond funds are perceived to offer the best combination of risk and reward,” said Cameron Brandt, global-markets analyst at EPFR. The first port of call this year, however, has been U.S. bond funds, which had taken in a net $58 billion year-to-date through Wednesday, he said. Investors have been yanking cash out of money market funds — to the tune of $151 billion in net outflows from July 23 to Sept. 16, according to EPFR — and are now showing an increased appetite for greater yields. And some advisers already have positioned their portfolios for emerging-markets exposure. “We are big believers in emerging markets,” said Matthew Illian, wealth manager at Marotta Wealth Management Inc., which has $135 million in assets under management. “The U.S. [gross domestic product] growth is expected to be flat over the coming year. But emerging markets are expected to grow 4% to 5%.” The firm commits about 18% of its international-equity allocation and 18% of its foreign-bond allocation to emerging markets, he said. “There is a big concern that the U.S. dollar is going to decline significantly, particularly against emerging-markets currency,” said Scott Kays, president of Kays Financial Advisory Corp., which has $120 million in assets under management. “If you are in emerging-markets bond funds, you may get a higher interest rate and a little bit of currency tail wind.”