A Flight Out of Europe

New data shows Europeans are investing outside of the region via internationally-focused fixed income funds

Dan Lefkovitz 29 May, 2012 | 5:00PM
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New Morningstar fund flows data shows investors were funnelling their money into fixed-income funds in April. In the following article, Dan Lefkovitz from Morningstar’s European research team explains where the money was going, and which funds saw sizeable capital inflows.

Investors Are Getting Into Fixed Income...
In a long-running trend, fixed income funds that avoid European government debt were extremely popular amongst European investors in April.

The four most popular Morningstar fixed income categories in April were USD high yield bonds, GBP corporate bonds, global bonds, and global emerging markets bonds, according to our latest Morningstar European asset flow data. 

Yields on corporate and emerging markets debt have come down thanks to investor demand, but they still offer investors far more income than bank deposits. They are risk assets that are perceived as not as risky as equities, and they look attractive compared to European government debt.

At the fund level, Alliance Bernstein American Income (which is not available for sale in the UK) has been one of the biggest beneficiaries of investor appetite for non-European fixed income. The fund took in nearly EUR 500 million in April, bringing its inflow to EUR 2.4 billion so far in 2012.

...And Out of European Equities
Meanwhile, on the equity side, investors were unsurprisingly fleeing European equities. Morningstar’s eurozone large-cap equity category suffered its fourteenth consecutive month of outflows in April, losing EUR 900 million. The Europe large-cap value equity category has lost EUR 2 billion so far in 2012 and France large-cap equity category has suffered similar outflows.

The same trend is apparent in flows to exchange traded funds. Several Europe-domiciled ETFs focused on Euro STOXX 50 saw outflows in April, and a whopping EUR 4 billion left iShares DAX in April.

Meanwhile, the most popular equity category in April was the US large-cap blend equity with EUR 1.8 billion in flows. Global emerging markets also equity attracted  EUR 384 million in April. The emerging market category has seen EUR 5.6 billion worth of inflows so far in 2012, making it the most popular equity category in Europe. 

Allocation Funds Benefit from Uncertainty
In uncertain times, funds that mix stocks, bonds, and other assets hold appeal; they play into investors’ twin desires for both capital appreciation and capital preservation. Not surprisingly then, Morningstar’s EUR flexible allocation and GBP flexible allocation categories, which give their portfolio managers more latitude to achieve these twin goals than more traditional allocation funds (cautious, moderate, aggressive), have been the two most popular allocation categories so far in 2012.

One of April’s biggest winners was Baring Dynamic Asset Allocation (for institutional investors); its EUR 447 million inflow was its largest on record. M&G Optimal Income posted another strong month in April and has attracted nearly EUR 2 billion in 2012.

Although it sits in Morningstar’s alternative multi-strategy category, Standard Life’s Global Absolute Return fund dovetails nicely with the zeitgeist. Flows into this alternative bellwether have been building in recent months following a relative lull in the second half of 2011. Assets in the UK fund stand at EUR 13.2 billion, while the Luxembourg version of the fund, launched one year ago, has reached EUR 2 billion. The fund carries a bronze Morningstar Analyst Rating.

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

Dan Lefkovitz

Dan Lefkovitz  is strategist for Morningstar’s Indexes group

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