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By Holly Cook | 10-25-2012 03:00 AM

3Q Asset Flows Show Disconnect Between Sentiment and Action

Investors continue to tread cautiously but asset flows in the third quarter show they're forced to take on risk in the hunt for yield

Holly Cook: For Morningstar, I’m Holly Cook and I’m joined on the telephone today by Ali Masarwah. He is in our Frankfurt office and we’re going to be talking about asset flows over the third quarter in Europe. Ali, thanks very much for joining me.

Ali Masarwah: Thanks for having me.

Cook: So, let’s just take a kind of broad overview of the third quarter. It seemed like maybe investors are starting to feel a little bit more positive, is that's what is reflected in the asset flows?

Masarwah: Yes, absolutely. That is reflected in the asset flows. We are seeing for the first time in months, net inflows into equity funds, which has not been the case since February of this year. So yes, investors are becoming more positive on the equity side. The overriding theme, however, is still that we are having the bond fund hype and investors are still pouring loads of money into bond funds. But yes, there is light at the end of the tunnel for equities obviously.

Cook: So let’s drill down a little bit more into the equities. Which specific areas have been really popular with investors in the third quarter?

Masarwah: Well, in the third quarter we are seeing the largest share of inflows into equities going into Global Emerging Markets Equity funds and also Global Large-Cap Blend and Global Large-Cap Value Equity funds.

Cook: And how about on the un-loved side, any areas that are really – that are being sold off by investors?

Masarwah: Yes. We have seen this trend for a couple of months now that US and UK Large-Cap Blend funds are being sold. We also see that Asian Equity and China Equity as well as other single country equity funds are being sold on the back of inflows into the more broadly diversified equity categories.

Cook: So what does that tell us then about what investors are feeling?

Masarwah: Well, the investors are edging back into the equity fund side of the market, but they are still obviously very careful, treading carefully. It's an interesting disconnect we’ve been seeing in this quarter. We’ve had buoyant equity markets since July and investors into equity funds have only reacted now in September to this upward trend in the equity market. So, obviously very much risk averse and still treading carefully.

Cook: Ok, so let’s flip to the fixed income side. Obviously bond funds have really been dominating asset flows for a lot of 2012. Is that still the case?

Masarwah: It's very much the case in the third quarter. It's been like this for the whole year and this trend was only slightly muted after July and August. We are seeing extremely high inflows into US high yields, global high yield bond funds and it's amazing actually.

Cook: So overall, looking at the asset flows across the whole of the third quarter, it's sounding a little bit like investors are still rather risk averse in sentiment, but yet they are putting a lot of money into the riskier areas. Is that right?

Masarwah: Yes, it's perfectly right. I think investors are still very defensive and the reason why they are buying highly yielding bonds is that they don't have any alternatives, because they have to – they are seeking yields, they need yields and higher risk bond funds are the only source they are finding, because safe government bonds do not provide the yield that especially institutional investors need right now.

Cook: Well Ali, thanks very much for joining me. I think it will be really interesting to talk again in three months’ time at the end of the year to see how things will change. Thanks for joining me.

Masarwah: Thank you very much Holly.

Cook: For Morningstar, I am Holly Cook. Thanks for watching.

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