Volatility in global stock markets has been generating a lot of headlines since the start of the year. Stocks price have tumbled, with banks and energy stocks leading the downward charge. Fears about the European banking sector, centred on Deutsche Bank and its piles of debt, has spilled over to the UK in the past few weeks and caused a sector agnostic sell-off.
The market dip on Thursday last week brought European markets to their lowest levels in more than two years, according to Morningstar Data.
This week the pan-European Stoxx Europe 600 index climbed 2.9% as US stocks advanced, oil prices climbed and solid Eurozone growth data helped eased global growth worries. The German DAX and France's CAC 40 index both rallied about 2.5% while the UK's FTSE 100 climbed 3.1%. However, concerns over the volatile market remain high.
Advisers and investment professionals continue to urge investors not to panic and say the market downturn should be considered as a chance to buy some high-quality companies at a cheaper cost. But this is easier said than done. Human nature tends to flight rather than fight, and fears about further falls often lead investors to sell up and crystallise losses. We examine the fund flows data on Morningstar Direct to see what investors have been bold enough to buy.
Investors Flee From Fixed Income
European investors sold out of more fixed income funds than any other asset class in January, with net outflows of €15 billion, although this is far from outflows of June in 2013 where funds recorded outflows of €27 billion in single month. Worst hit were high yield fixed income funds, which saw outflows of €6.3 billion in January according to Morningstar Direct data.
Euro Corporate Bond funds were also unpopular among investors, with an outflow of €2.4 billion in January alone. It was the worst hit in January of the fund over the past five years. The worst fund in the Euro Corporate Bonds flow rankings was BlueBay Investment Grade Bond, with an outflow of €344 million in January alone. The fund is rated Bronze by Morningstar.
Fund analyst Carlos Lucar commented that the fund’s negative relative performance was due to an overweighting to credit risk, which was challenged by fears of ‘Grexit’ and emerging markets growth weakness. However, Lucar retained positive view on the fund given the exceptional long term performance and risk-adjusted track record for the managers’ strategy.
Demand for fixed income funds, while weak, was concentrated in the least popular fund of January, Swiss RE (Lux) I Long Term Asset Allocation. The fund saw outflows of €1.5 billion, accounted for one third of outflows into the asset class. Also this is the first recorded outflows of the fund over the last five years.
Reaumur Actions was the second least popular fund of the month, with outflows of €1.3 billion.
The third least popular fund of January 2016 among European investors was M&G Optimal Income, with outflows of €1.1 billion. The fund has been losing money since April last year, with June 2015 the worst month on record with outflows of €1.7 billion. The fund is rated Silver by Morningstar.
Equity funds saw outflows of €6 billion in January. This was the first month recording outflows in the asset class as a whole since August last year when outflows reached to €21 billion. The worst equity categories in January included Asia ex-Japan Equity, with outflows of €1.6 billion, and Greater China Equity, with outflows of €1.1 billion.
Allocation funds also saw outflows of €4.4 billion in January.
Where was Investors’ 'Safe Haven'?
Alternative funds topped the buying list in January, with inflows of €4 billion. Multi-asset alternative was the most popular category with inflows of nearly €2 billion. Long Short equity was also popular which saw inflows of €1.4 billion in January.
Despite the major outflows in equity funds, Europe Equity Large Cap topped the flow rankings with inflows of €2 billion. The category has been a popular asset to buy among investors since January last year.
Property funds recorded the third largest inflows across asset class with inflows of €1.1 billion in January. Commodity funds saw inflows of €41 million in January.
The most popular Morningstar category in January was Euro Ultra Short-Term Bond, with inflows of €2.5 billion. Alternative Market Neutral Equity was the second most popular Morningstar category with inflows of €1.5 billion. Old Mutual Global Equity Absolute Return topped the list in this category with inflows of €545 million in January, which saw the largest inflows of this fund over the past five years.
Demand for multi-strategy funds was also strong, with inflows of €1.5 billion in January alone. Of the top selling multi-strategy category, Standard life Investments Global Absolute Return Strategies came first with inflows of €399 million. The fund is rated Bronze by Morningstar. Fund analyst Randal Goldsmith said despite past team member changes, the fund remains stable to meet its performance objective. The fund has one of the more successful track records within the absolute return peer group, Goldsmith says.
