Multiple defense policies in mid-March

As the first quarter of 2026 headed into its final fortnight, investors were looking at a range of threats to their portfolios. These include conflict in the Middle East, stress in private credit markets, the threat of stagflation, rising sovereign debt levels and the ROI on the billions of dollars being spent developing artificial intelligence (AI) and its supporting infrastructure.

Ranking these threats, and developing defensive strategies, took investors in multiple directions during the week ending March 18. Aerospace & Defense Funds posted their largest weekly inflow on record but funds dedicated to the raw materials needed to make those weapons – Commodities Sector Funds – experienced record-setting outflows. Inflation Protected Bond Funds tallied their seventh straight inflow while Physical Gold Funds chalked up their biggest outflow since the fourth week of October.

Investors did keep faith with Dividend Equity, US-mandated liquidity and fixed income funds, Global Equity Funds and funds offering exposure to infrastructure, industrial and AI plays. On the other side of the coin, they cut their exposure to credit risk, emerging markets assets, British debt and the SRI/ESG theme.

Overall, the latest reporting period ended with all Equity Funds reporting a net inflow of $62.2 billion that likely reflects the influence of the first ‘quadruple witching’ date of the year. Investors steered $10.2 billion into Bond Funds and $23.5 billion into Money Market Funds during a week featuring multiple major central bank policy meetings while Balanced and Alternative Funds saw $975 million and $1.6 billion flow out, respectively.

At the asset class and single country fund levels, Cryptocurrency Funds pulled in over $1 billion for the fourth time year-to-date, Private Credit Funds recorded their 12th inflow over the past 13 weeks and redemptions from all Copper Funds hit a 46-week high. Belgium Equity Funds tallied their biggest inflow in over three years, another $2.9 billion flowed out of Turkey Money Market Funds and Russia Bond Funds set another weekly inflow record.

Emerging Markets Equity Funds

The six-week inflow streak compiled by EPFR-tracked Emerging Markets Equity Funds since the start of February came to an end during the latest reporting period as the conflict centering on Iran prompted investors to step up their risk reduction. Both Asia ex-Japan and the diversified Global Emerging Markets (GEM) Equity Funds saw over $2 billion flow out, more than offsetting the inflows recorded by Latin America and Frontier Markets Equity Funds.

Retail share classes posted their biggest collective outflow since late November, Leveraged EM Equity Funds saw their longest inflow streak in over 14 months come to an end, and EM Dividend Equity Funds chalked up their largest inflow since early 2Q24.

The Asia ex-Japan Equity Fund universe again saw the biggest flows in both directions as redemptions from India and China Mainland Equity Funds exceeded $1 billion and $2 billion, respectively, while investors continued buying into Taiwan (Province of China) and Korea’s memory and high-end chip stories. In the case of funds dedicated to India, the outflows come as the country’s central bank wrestles with the impact of the energy shock stemming from the Iran conflict on inflation and the country’s currency, the rupee.

There was little appetite for exposure to the region’s smaller markets, with Vietnam Equity Funds posting their ninth outflow year-to-date and Thailand Equity Funds their 102nd over the past two years while redemptions from Malaysia Equity Funds climbed to a 47-week high. But research by economists from ISI’s CEIC on ASEAN currencies suggests that Malaysia may prove resilient in the face of current events. 

“As an oil producer, it’s notable that Malaysia’s ringgit (MYR) (and, to a lesser extent, Indonesia’s rupiah) depreciated somewhat less than the heavily [oil] import-dependent Philippines peso and Thai baht,” they wrote in a recent report. “The ringgit’s relationship with oil has become less important post-Covid, as our correlation charts show. The MYR seems less likely to return to a “petro-currency,” with its performance instead likely governed by the country’s ability to navigate broader economic uncertainties.”

Latin Equity Funds absorbed fresh money for the 10th week running, with the bulk of the latest inflows going to funds with diversified regional mandates. Fund groups dedicated to major copper producers struggled, with redemptions from Chile and Peru Equity Funds climbing to 13 and 41-week highs, respectively.

Among the EMEA Equity Fund groups, flows began to tilt from energy importers to oil producers. Flows into Qatar and United Arab Emirates (UAE) Equity Funds hit record highs while both South Africa and Turkey Equity Funds experienced significant redemptions.

Developed Markets Equity Funds

The week ending March 18 saw flows into EPFR-tracked Developed Markets Equity Funds repeat their usual pattern ahead of the year’s first ‘quadruple witching’ date when thousands of US options contracts expire and are settled, rolled over or replaced with new ones. That pattern frequently sees a surge in trading and ETF flows ahead of the date and an outflow the week after.

During the latest week, US and Global Equity Funds accounted for the bulk of the week’s total with Japan and Canada Equity Funds both attracting over $1 billion and Europe Equity Funds eking out a tiny inflow.

The eye-catching number posted by US Equity Funds certainly contrasted with the backdrop of sour macroeconomic data, rising energy prices and falling equity indexes. Mixed-mandate funds across all capitalizations posted the biggest inflows and flows into US Dividend Funds hit their highest level in over two decades.

Among the US-mandated groups experiencing redemptions were US Equity Insurance Funds which invest in variable annuities and are key parts of many US retirement portfolios. In recent years, rising markets have boosted the group’s total AUM while the growing number of ‘baby boomers’ retiring has seen cumulative redemptions gather momentum.

Europe Equity Funds posted their ninth inflow so far this year, but the headline number was minimal as investors weighed the impact of another energy shock on European manufacturers, producer prices and the policymakers at the European Central Bank (ECB). Germany Equity Funds posted their biggest outflow since early December and Spain Equity Funds extended their longest run of redemptions since November while Switzerland Equity Funds attracted over $1 billion for the second week running.

While the ECB did not tighten at its latest policy meeting, Australia’s central bank did hike its key rate in an effort to prevent a repeat of the post-Covid inflationary surge. Australia Equity Funds still recorded a modest inflow. So did Japan Equity Funds ahead of the Bank of Japan’s March meeting, which ended with interest rates on hold.

Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, extended their current inflow streak to 21 weeks and over $150 billion.  During the latest week, flows favored Global ex-US Funds over their fully global counterparts by a three-to-one margin.

Global Sector, Industry and Precious Metals Funds

During the week ending March 18, six of the major EPFR-tracked Sector Fund groups managed to attract fresh money while five experienced net redemptions. In keeping with the geopolitical backdrop, groups offering exposure to defense or a defensive reputation stood out.

At the individual fund level, the fund with the week’s biggest inflows ($3.3 bn) and the fund with the biggest outflows ($1.9 bn) were both Aerospace & Defense Funds. The former helped Industrials Sector Funds maintain their recent run of inflows, while a Commodities Sector Fund sub-group, Chemicals Funds, posted their biggest outflow on record as investors factored in the supply and distribution challenges stemming from the US-Israeli assault on Iran.

EPFR Stock Flows & Allocations data for the largest chemical producer in the world, BASF, shows active managers heavily underweight the stock prior to 2025. But in mid-2024, active managers started allocating more to the stock and are now benchmark weight, or slightly overweight as of the latest month. Passive and active investors have been committing relatively consistently to the German chemical giant year-to-date, with inflows up above 5% and 2% of the stock’s assets, respectively.

Utilities Sector Funds recorded a third straight week of above-average inflows, extending their overall streak to five weeks. A subgroup of funds with “electric” or “electrification” in their fund name pulled in 30% of the broader headline number this week. Both of the past two weeks have been record-setting inflows for Electric Utilities Funds.

After 15 straight weeks in positive territory, during which they absorbed almost $40 billion, Commodities/Materials Sector Funds posted a record-setting outflow. At the fund-level, redemptions from gold mining, chemicals, and rare metals funds drastically offset the inflows to natural resources.

Bond and other Fixed Income Funds

The latest headline number for all EPFR-tracked Bond Funds rested squarely on the fresh money committed to US Sovereign, Mixed and Municipal Bond Funds, in that order, as investors sought safety from the consequences of a conflict whose latest round was started by the US on economic growth, inflation and interest rates.

Among the asset classes currently not viewed as safe are European debt, junk bonds and emerging markets hard currency bonds. The week ending March 18 saw redemptions from all High Yield Bond Funds jump to a 48-week high, Europe Bond Funds post their biggest outflow since mid-3Q24, and Emerging Markets Bond Funds tally their sixth outflow of the year.

In the case of Emerging Markets Bond Funds, it was the diversified Global Emerging Markets (GEM) Bond Funds that again experienced the heaviest redemptions, with this week’s total being the largest since early 2Q25. At the country level, Brazil Bond Funds swam against the broader tide by posting their 24th straight inflow as investors responded to the near 14% yields on the country’s 10-year sovereign debt.

The allure of US Bond Funds continues to be a domestic phenomenon, with foreign domiciled funds extending their longest outflow streak since 1Q22. Overall flows into retail share classes did climb to a six-week high and funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates snapped their longest run of redemptions in over eight months.

Although most Europe Bond Fund groups posted an outflow or a minimal inflow, the headline number was driven by the biggest outflow from UK Bond Funds since mid-3Q24. A single short-dated credit fund accounted for the bulk of the UK number.

US Bond Funds took in fresh money for their 46th week in a row, with flows tilting strongly towards funds with sovereign mandates. Foreign domiciled funds posted their third straight outflow. With investors on the lookout for alternatives for US assets, Japan Bond Funds tallied their biggest inflow since mid-October. The Bank of Japan meets next week and is expected to keep its key rate on hold.

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