European Investors Flock Back to Long-Term Funds

Investor confidence returned in July, as equity funds across the region recouped some of the losses of the previous month

Ali Masarwah 2 September, 2013 | 2:52PM
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As equity markets rebounded after a six-week bout of volatility, and with the nervousness of bond investors seemingly receding, European investors flocked back to long-term funds in July.

European open-end funds posted significant inflows of 26.76 billion, making good to some degree the huge outflows of 35 billion seen in June. Money market funds suffered outflows of 1.07 billion, making July the fourth consecutive month of outflows for the sector.

Save property funds and commodity funds, which suffered net outflows, all long-term groups saw inflows in July with equity funds enjoying 10.22 billion in net new money, followed by allocation funds, which gathered net 8.1 billion.

Although flows into fixed-income funds recovered somewhat, last month’s positive inflows of net 5.47 billion were a far cry from the huge demand for bond funds in the previous 18 months. In fact, July 2013 inflows were the lowest seen in any month with positive inflows since May 2012. Since January 2012, bond funds saw net inflows in 18 out of 19 months. Diversified bond funds and European government bond funds fell out of favor, while high-yield and short-term bonds carried the day, arguably reflecting investors´ reference for the less-interest-rate-sensitive credit and shorter duration investments in times of rising interest rates.

As Morningstar bond strategist Dave Sekera points out, with the tapering of the US bond-buying program - quantitative easing - looming ahead and rates likely to rise further, investors showed more appetite for alternative funds, which are perceived to offer a better chance of capital preservation than bond funds. This is reflected by the demand for long-short debt funds, which have seen the highest inflows of all Morningstar alternative funds year to date.

Turning to the most loved Morningstar categories, high-yield bond categories saw the highest inflows after the June rout with the US high-yield bond category enjoying 3.47 billion, a stark contrast to the previous month when 3.75 billion walked out of the door. Inflows into global high-yield bond funds reached a solid 2.07 billion after losing 4.94 billion in June.

The equity fund categories in highest demand last month were US large-cap blend and global equity income funds, which also topped all other equity categories year to date with inflows of 5.43 billion and 10.84 billion, respectively.

Turning to the least-loved categories in July, European and US diversified bond categories lost the most, hemorrhaging 1.74 billion and 1.73 billion, respectively.

Global emerging-markets bond funds, both hard currency funds and those investing in local currencies, had yet another month of ill fortune, suffering net redemptions of 1.07 billion and 620 million, respectively. With bond rates rising in the G7 nations, global investors have shunned emerging-markets bonds for the past two months as return prospects for emerging-markets investments appear to turn sour.

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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Ali Masarwah

Ali Masarwah  was the editor of in Germany.

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