Massive Emerging Markets Fund Flows Get Burned

Nov.14.10 | About: iShares MSCI (EEM)

A stunning $5.4 billion flowed into emerging markets funds last week, but beware: Traders who loaded up on this asset class last week are looking at losses. Flows last week were 2.6 times the 12-month average, and this is the biggest year in recent history for emerging markets funds with $75 billion in new money coming onboard YTD.

Most of the flows are still to funds with global ($3.2 billion) and Asian ($1.5 billion) mandates, but Latin funds continue to gradually pick up ($261 million, 1.2 times the 12-month average). On the other hand, U.S. equity funds also saw big inflows ($9 billion, 2.3 times the average), so we could simply be seeing a broader-based return of the retail investor here.

Normally this would be very positive despite the technical concerns that come with these types of inflows. Clearly macro data points and policy have been accommodative of risk, but broader signals not so good. (Watch sovereign risk in Europe and even Dubai.)

And simply chasing flows is not a recipe for returns. Buying into last week’s strong emerging markets flows — moving into iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM), for example — would still have left you with a 4% loss by the close of trading on Friday.

Disclosure: Author holds no position.