LONDON (Reuters) - Active fund managers enjoyed a slight respite from the relentless rise of passive index-tracking this week, with the biggest inflow to active equity funds in two and a half years, Bank of America Merrill Lynch strategists found on Friday.
Some $3.5 billion flowed into mutual funds while investors placed $6.4 billion into ETFs, together the biggest equity inflows in five weeks as risk-on sentiment prevailed, BAML's weekly report on investor flows tracked by EPFR showed.
Assets under management in long-only funds were still down 1.2 percent year-to-date, against a 9.7 percent increase in assets managed by ETFs.
As earnings season kicked off in Europe, the region's equities drew their largest inflows in ten weeks, with $3.0 billion, while U.S. stocks sank deeper into relative unpopularity with their fifth straight week of outflows.
Some $24 billion has flowed out of the world's biggest equity market over the past three months while $19 billion poured into European stocks and $20 billion into emerging market equities as investors were drawn in by a more attractive rates and earnings outlook, and lower valuations compared to U.S. stocks.
Bonds meanwhile saw their 18th straight week of inflows, and high-yield bonds had their biggest inflows in three months as investors searched for yield.
Investment grade bond funds drew inflows for the 30th straight week, with $7.5 billion, while $1.8 billion flowed into high-yield bonds and emerging market debt funds had their 25th straight week of inflows.
In a week which saw world stocks hit new record highs, BAML's "bull & bear indicator" of risk sentiment escalated to 7.4 from 7.0, nearing the 'extreme bullish' level and not far from a signal to sell, strategists said.
But as calls for a correction multiply, they recommended investors hang on a little longer.
"Stay long risk assets until sentiment reaches euphoric territory of 8.0," they added.
Strategists drummed on their theme of global stock markets' Icarus-like flight higher culminating in a 'Humpty-Dumpty' fall in risk assets in the autumn.
They added the caveat that an earlier stumble could be precipitated if the collapse of the U.S. administration's healthcare bill had a ripple effect on the wider economy.
"In the absence of immediate negative impact on small business employment following Obamacare repeal/replace failure and/or lurch toward tech-negative Occupy Silicon Valley policies, we think big fall in markets an autumn not summer event," they said.
Reporting by Helen Reid