Risk appetite returned during the first week of December, with financial sector funds worldwide absorbing a net $1 billion in inflows in the past week, according to data provider EPFR Global. Plenty of investors remained cautious, however, with money market funds taking in a net inflow of $21.3 billion.

Equity funds geared to developed markets continued to suffer with US, Japan and Europe equity Funds all posting outflows during the week. The combined net outflows from these three fund groups since the first week of August now stand at $45.9 billion. During that same period emerging markets funds took in a net $26.9 billion.

ôSome of that is still attributable to the fact that developed markets have more direct exposure to the US subprime debt crisis, and some to the fact another US rate cut, if it happens, is going to hit Japanese and European export competitivenessö says Massachusetts-based EPFR Global senior analyst Cameron Brandt. ôBut much of it boils down to basic performance.ö

The average Asia ex-Japan equity fundÆs year-to-date portfolio gain is nearly eight times larger than the 7.3% returned by their US equity fund counterparts and 11 times greater than the average gain posted by global bond funds, says Brandt.

The combination of strong gains in key markets, expectations of another US interest rate cut and lower energy prices set the stage for strong flows into emerging markets equity funds during early December, EPFR Global says.

The diversified global emerging markets funds attracted $2.52 billion as they posted average portfolio gains of 4.55% while Asia ex-Japan equity funds, helped by combined inflows of $1.06 billion into China country and Greater China funds, absorbed a net inflow of $2.27 billion.

Latin America equity funds, meanwhile, recorded inflows totaling $467.8 million as sentiment towards the region was boosted by the popular vote against constitutional amendments that would have facilitated Venezuelan President Hugo ChavezÆs plans for implementing a socialist economic framework. Year-to-date, these funds are sitting on average gains of over 63% and net inflows stand at 306% of the total for 2006, EPFR Global says.

EMEA equity funds had their best week of the year, as did Russia country funds, and Brazil, Russia, India and China (Bric) equity funds, which took in a net inflow of $409 million. Helped by the recovery in the Bric theme, stronger than expected oil prices and greater clarity regarding the political landscape after President Vladimir Putin steps down next year, Russia country funds have now posted 13 straight weeks of net inflows. During that period the value of the assets they manage have grown 42%, EPFR Global says.

Although the pace of the outflows slowed, both Japan and Europe equity funds extended their losing streaks during the first week of December as the prospect of another US interest rate cut prompted investors to pencil in more pain for their key export sectors. Japan equity funds have now posted 36 consecutive weeks of net outflows and remain the only major EPFR Global-tracked equity fund group whose year-to-date performance is negative. Net redemptions, however, came in under $100 million for only the third time during that streak.

Outflows from Europe equity funds were also well of the $1.42 billion they have averaged during the current 14-week streak of outflows. But expectations that the European Central Bank would shift to an easing bias to preempt the effects of the sub-prime mess were dashed when the ECB kept its key rate on hold and went out of its way to stress its concerns about inflationary pressures, EPFR Global says.

US equity funds, meanwhile, gave up a net $6.1 billion during the first week of December with the bulk of the outflows coming from funds investing in small-cap equity. Year-to-date outflows now total $26.6 billion, a little over a quarter of the $109 billion gained collectively by these funds during the same period. This week only mid-cap funds managed for growth outperformed their value counterparts in both flows and performance terms.

EPFR tracks around $10 trillion in assets in traditional and alternative funds worldwide.