While many investors have adopted a defensive stance, they are far from throwing in the towel despite massive write-downs by major banks, fresh evidence that the US could slip into recession and declines on equity markets around the world, according to data produced by fund tracker EPFR.

While a good share of the money that flowed into EPFR-tracked funds last week went to the more defensive groups û US equities and bonds, money market, health care and utilities sector funds û some made its way into financial sector and US small-cap equity funds.

ôThat investors are willing to put money into funds whose mandates are banks and US small-cap stocks seems a bullish signal,ö says Massachusetts-based EPFR managing director Brad Durham. ôSo is the fact that overall emerging markets equity funds managed to post modest inflows despite sharp drops in many emerging markets and the rough ride that markets are experiencing as they price in an expected US recession.ö

The flows into US funds aside, investors also continued their recent pattern of rotating out of funds that invest primarily in developed markets into ones geared to cash, commodities and emerging markets. Europe equity funds posted record-setting outflows last week and significant sums were pulled out of global bond, global equity and Japan equity funds.

Helped by flows into large exchange-traded funds (ETFs), US equity funds posted their first weekly inflow of the year as investors committed more money to small- and large-cap funds than they pulled out of mid-cap funds. They also committed more money for growth-oriented funds across all capitalisations despite the fact they broadly underperformed their value counterparts.

Signs of an impending US recession prompted the US Federal Reserve to signal that more interest rate cuts are coming and the US government has just unveiled its intention to offer a fiscal stimulus package. The Federal Reserve has cut its key federal funds target rate by 75bp to 3.25% from 4.25%. That marks the FedÆs biggest interest rate cut since 1984.

Last week, the prospect of further monetary easing was helpful for US equity funds, but it added to the pressure on Europe and Japan equity funds.

The two diversified fund groups geared primarily to developed markets also had a rough week. Global equity funds recorded their first week of outflows for the year, while Pacific equity funds posted their fifth straight week of net redemptions.

A fourth straight week of net inflows for Europe, Middle East and Africa equity funds and modest flows into the diversified global emerging markets equity funds -- underpinned by more solid flows into BRIC Equity Funds -- offset outflows from Latin America and Asia ex-Japan funds last week.

At the country level, China equity funds posted inflows for the first time in five weeks even though these funds turned in a -11% loss for the week, while Russia equity funds absorbed fresh money for the nineteenth consecutive week.

Defensive sectors fared well during the second week of January. Investors parked $833 million in commodity sector funds, in part to sidestep further dollar weakness, $259 million in healthcare/biotechnology sector funds, and $184 million in utilities sector funds. But they also committed $1.9 billion to financial sector funds, a bullish bet that the latest round of write-downs means that key banks have put the worst of the subprime crisis behind them.

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