Records fall as yield safari continues

19 August 2014
By Mauro Baratta

The pattern of inflows into Europe’s non-ETF long-term mutual funds in June again bore a striking resemblance to the preceding month, and in terms of volumes, the €34bn contributed by investors was verging on identical. Looking at the first half of 2014, total net sales blew equivalent past periods out of the water, €225bn towering above the nearest contender, 2013’s €167bn.

June was a decisive month in these figures — cumulative year-to-date sales had trailed behind their 2013 counterparts all the way up to May — the lynchpin this year being no repeat of last June’s taper tantrum as the summer got underway. Annualised data suggest that 2014 could be shaping up as the European fund industry’s best ever year by a significant margin, but the darkening clouds on the horizon may yet rain on the parade (see Economic Background and European Forecast sections).

A fixed trend

With the exception of January, the fixed income asset class has dominated Europe’s fund sales so far this year — to the initial surprise of many. While support has come from a wide variety of sectors, flexible bond funds have led the field, contributing around 15% of the category’s inflows. M&G’s Optimal Income has enjoyed the lion’s share of investor attention, but products from PIMCO, Goldman Sachs, and BlueBay have also attracted considerable money during the period. Euro-denominated government bond funds have also been a stalwart sector, while emerging market bonds were well and truly back on the menu during the second quarter, at the expense of corporate investment grade and high yield products. That said, the latter two did benefit from a more generous June while emerging market sales, though still strong, cooled a little.

The high yield sector in particular has been the subject of much talk. Investors have been willing to take on the inherent risk in order to generate a half-decent return, but a number of key bodies such as the US Fed and Bank of International Settlements have expressed concerns over valuations. In June, despite substantial sales of other high yield sub-sectors, US Dollar-denominated high yield funds were bogged down with redemptions of €1.8bn in Europe, and July data on US fund sales from Bank of America Merrill Lynch highlights that retail investors have been dumping such products on the other side of the pond. It may be that they are now thinking twice about high yield, though attractive prices could encourage institutions back into the fray.

Also of note in the second quarter’s inflows was a return to form for global currency bond funds — headline figures for this core sector had been in the doldrums for months, in large part due to one of its main residents, the Templeton Global Bond Fund, suffering steep redemptions. By June, the fund’s withdrawals had slowed to a trickle, allowing the sales of other such offerings to power the sales balance towards €3bn.

Records in the mix

The unbroken support that retail investors have given to the mixed asset class over the past two years scaled new heights in June. €12bn of net inflows represented its best monthly tally and brought the total sales for the first half of the year to €62bn, the best ever for this period. The monthly figures were given an additional nudge upwards thanks to strong new launches from Newton in the UK and Azimut in Italy but a wide spread of products has been contributing to the category’s success — in June, 28 funds enjoyed sales in excess of €100m while just three were in outflow by the same amount. International investors have been the main proponents of mixed asset investment this year but several domestic markets have also proven keen, none more so than Italy, where investors have parked €15bn so far in 2014 — over half of local net fund inflows.

Air of caution settles over equities

Some stock market indices hit new highs during the first half of 2014 but judging by reduced equity fund subscriptions in the second quarter (€18bn compared to the first quarter’s €31bn), investors are approaching the asset class with increasing caution. The figures for June were particularly weak, non-ETF funds drawing in a net €3bn completely dependent on two new launches from Woodford Funds and Eastspring Investments. The month’s sales would have looked a bit healthier were it not for an institutional withdrawal of €3bn from a BlackRock global equities tracker, but even with this excluded, equities were still well and truly in the shade of the fixed income and mixed asset classes.

Developed market equity funds, and particularly those with a focus on Europe, fared the best during the first six months, though it will be interesting to see the impact of the torrid declines seen on many of the European bourses in July on that month’s inflows. If investors feel that this sent valuations back to more realistic levels, it may have encouraged further inflows, though this will also depend on them having the stomach to invest in an increasingly fractious geopolitical environment.

Just as in the fixed income arena, generalist emerging market funds also started catching the eyes of equity investors once again during the second quarter, after months of outflows. Their support has been rewarded by reasonably solid market performance and though there has been little in the way of market-specific appetite, a 7.5% return on Shanghai’s index in July may lure some investors back into placing more chips squarely on the Middle Kingdom.

The most eye-catching equity play recently has however been the uptick in ETF investment, a telltale sign of sophisticated investors at work. June saw an additional €3bn added to the equity tally thanks to ETFs, while across the first half, net equity fund inflows including ETFs hit €61bn — €13bn higher than non-ETF sales.

The yield safari

The image of a safari seems appropriate for the ongoing search for returns. Like adventurers holding out for increasingly exotic sightings, many investors have been accepting a higher degree of risk to catch a glance of the elusive yield, evidenced by the popularity of high yield and emerging market products. At the more conservative end of the spectrum, flexible and mixed investments are favoured, in the hope that returns will be roaming the savannah whatever the weather — and with a smaller chance of fingers being bitten.

Source: Fund Radar Second Sight Issue 2014/07