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2012: A Year of Bond Fund Hegemony

ASSET FLOWS: The flow of money in and out of funds in 2012 represent a bond boom by default, says Morningstar's Ali Masarwah

Ali Masarwah 29 January, 2013 | 10:22AM

The books are closed on 2012 and despite the challenging macroeconomic environment, European investors were still enthusiastic for long-term funds. They added EUR 26.6 billion in December 2012, bringing total net inflows to long-term funds to EUR 204.6 billion over the course of 2012. Still, inflows remained well below 2009 and 2010 levels, when long-term funds attracted EUR 214.8 billion and EUR 255.2 billion, respectively. But compared to 2011, when the eurozone crisis was raging more violently, sentiment in 2012 was bullish. That year, investors pulled EUR 58.6 billion out of long-term funds. Bearing in mind that the crisis is not resolved, Europe’s fund promoters have fared reasonably well.

The Changing Landscape of Mutual Funds in Europe

The eurozone crisis has, however, invoked a marked shift in Europe’s fund landscape. Fixed income vehicles witnessed an unprecedented boom in 2012. Investors poured a breath-taking EUR 176.5 billion into bond funds in 2012, the highest inflows on record (Morningstar’s European flows data dates back to 2007). In fact, bond funds captured 10 times the inflows in 2012 than they did from 2007 to 2011 combined. 

Within fixed income, higher yielding bond funds captured far more money than government bond funds, which are seen as neither risk free nor high yielding. In contrast to the US, where the love affair with bond funds dates back to 2007, the fixation is newer for Europe. Before 2012, flows in Europe were distributed fairly evenly between bond and equity funds. In fact, from 2007 to 2011, equity funds enjoyed greater net inflows than bond funds, posting a combined EUR 28.4 billion in inflows against EUR 18.6 billion seen by fixed income funds over that five-year period. 

Equity Funds: A Brighter Shade of Pale Towards Last Year’s Close

Stock funds suffered net outflows of EUR 6.8 billion in 2012. Had the fourth quarter not seen a gradual return of risk appetite, the picture for equity funds would have been even bleaker. Equity fund flows bounced back in the last three months of 2012, enjoying inflows of EUR 7.0 billion in December and EUR 13.7 billion from October to December.

Allocation funds, whose multi-asset nature appeals to investors in uncertain times, were another success story of 2012. Mixed-asset vehicles saw EUR 29.7 billion in net new money with cautious and flexible funds profiting the most. 

On the other hand, money market funds appear to have lost all of their appeal. After the European Central Bank lowered interest rates in June 2012, yields on short-term vehicles fell into negative terrain even in nominal terms. After attracting flows in the first half of 2012 on the back of risk aversion, money market funds posted outflows of EUR 28.7 billion in the year’s second half. 

Bonds, Bonds, Bonds...And a Small Portion of Emerging Market Equities, Please!

Higher yielding bond funds attracted the lion’s share of investor capital in 2012. The list of most popular long-term Morningstar Categories for the year is dominated by bond funds throwing off income. Flows were led by ‘Other Bond’, a miscellaneous grouping which comprises mostly high yield, flexible and target maturity funds that are hedged. This group saw inflows of EUR 44.1 billion, followed by global emerging markets equity which enjoyed inflows of EUR 18.5 billion.

Conversely, the most unloved categories for the year were short-term and European government bond funds on the one hand. On the other hand, European stock funds were sold on the back of the continuing eurozone crisis. This picture remained consistent throughout 2012. Among the ten most heavily redeemed categories faring worst in 2012, only Asia ex-Japan equities saw positive inflows in the fourth quarter.

Turning to the fund level, our data shows a familiar, two-fold picture.

First, investors have yet again stuck to familiar names which seem to offer assurance in uncertain times. The European clone of Bill Gross’s PIMCO Total Return Fund, which carries a Morningstar Analyst Rating of Gold, came in first, just ahead of the AllianceBernstein AB American Income Portfolio which had a very strong fourth quarter and nearly caught up with the PIMCO flagship. In fact, four PIMCO/Allianz funds landed in the list of top ten most popular European funds of 2012.

Standard Life Global Absolute Return Strategies Fund came in third, taking in net EUR 5.5 billion, in spite of the uncertainty which arose after several members of the fund team departed in the third quarter of 2012. (Morningstar retained the fund’s Bronze rating despite the changes.)

Templeton Global Bond was not quite as fortunate. Investors, clearly spooked by the fund’s underperformance in 2011, redeemed EUR 1.7 billion worth of the fund’s shares in 2012. While Morningstar analysts have retained conviction in fund manager Michael Hasenstab’s approach (the fund carries an Analyst Rating of Silver), we have repeatedly warned investors to be wary of its inherent risks. Ironically, the fund rebounded in 2012, displaying the difficulty in timing a fund’s performance. Interestingly, flows to the fund turned positive in the fourth quarter, after investors saw the performance improve.

Europe’s second largest long-term fund, Carmignac Patrimoine, also demonstrated how fickle investor sentiment can be. The fund, which carries a Morningstar Analyst Rating of Gold, posted outflows for the second month running in December 2012. This moderate allocation fund underperformed its benchmark by 7.8% in 2012.

What About the Fund Promoters?

Unsurprisingly in the year of the bond fund, fixed income specialist PIMCO dominated flows, posting 2.5 times the inflows seen by runner-up AllianceBernstein. Only two of the 10 most popular fund providers were not bond-focused. Aberdeen was the main beneficiary of the flows to emerging markets equity funds, and M&G benefited from the popularity of allocation funds. If investors continue to focus on fixed-income investments in 2013, the beneficiaries of 2012 appear well set to continue featuring prominently in fund sales rankings going forward.

On the other side of the coin, the asset managers with the highest outflows in 2012 were mainly providers exposed to EUR government bonds (BNP Paribas, Santander, Anima), French equities and alternative funds (Edmond de Rothschild), or Asian and European equities (Fidelity).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author Ali Masarwah

Ali Masarwah  is the editor of Morningstar.de in Germany.