Holly Cook: For Morningstar, I’m Holly Cook and I’m joined today on the telephone by Ali Masarwah. He is joining us from Frankfurt for Morningstar. We are going to talk about the 2012 asset flows, looking back at the year as a whole, the trends that we've seen and what this means for 2013.
Ali, thanks very much for joining me today.
Ali Masarwah: Thanks Holly for having me.
Cook: So let's take a look back at 2012 as a whole first. It was the year of the bond fund, wasn't it? But that hasn't necessarily been the trend for all 12 months, is that correct?
Masarwah: Well, it’s perfectly right. We have seen the year of the bond fund and yes, it’s a huge, huge dimension we've seen. Just to give you the topline figure, we had net sales of EUR 180 billion flowing into bond funds, and this is an unprecedented thing. Just to put this into perspective, if you take the five years before, this is nearly ten times the figure seen in the five years before flowing into bond funds. So it’s a really unprecedented shift into fixed income vehicles.
Cook: Those really are some huge numbers. But what happened in the fourth quarter of the year? There’s been a bit of a switch in sentiment, right?
Masarwah: Well, if you see that – the equity markets globally have picked up at least after in the third quarter, end of the second quarter of 2012. Fund investors were pretty late in seeing this trend and anticipating this trend and following this trend. This has changed in the fourth quarter. The last three months have seen positive net inflows into equity funds. Yes, so I guess we are seeing a change in sentiment from fund investors.
Cook: And seen, of course, in the first few weeks of 2013 that markets have done pretty well. So obviously there’s definitely been a bit of a switch in sentiment towards a more positive outlook. But if we look again at the inflows into equity funds towards the end of 2012, I think emerging markets equity funds were amongst the most popular category. But that [trend] has actually been going for the year as a whole, hasn't it? So it’s almost a bit of a dichotomy between people looking towards bond funds, but at the same time going into the riskier areas of equities for emerging markets as well. What does that tell us about investor sentiment?
Masarwah: Well, I think it's quite difficult to understand, but on the one hand you have these huge inflows into bond funds. On the other hand, you see people buying emerging market equities, actually not only in the fourth quarter, but also over the whole year. And I think the best way to understand is to look at the big political and macroeconomic picture, the Euro crisis and also the debt crisis we are seeing in all of the industrialised nations has really overlapped and really dominated investor sentiment.
So when you talk about bond funds, we are not seeing inflows into government bond funds. We are seeing inflows into high yield corporate bond funds, even emerging market bond funds have been seeing huge inflows. So, why are investors doing this? I would argue they are not necessarily being taking risk. They are not taking risk as you might expect and they are running away from the government bonds and they were shying away from eurozone equities. So it's basically a boom by default.
Cook: Right. So it's actually a desperate search for yield pushing them into alternative areas?
Masarwah: Yes. You could say it this way. And also they – people are risk averse, but they are showing it by investing in emerging market bonds and emerging market equities because it is a bit strange but, compared with Europe for a lot of investors, obviously emerging markets are kind of a safe haven. I am not saying this is necessarily a perfect choice to do but there you are, this is investor sentiment.
Cook: Yes, it’s an interesting trend to be an observer of. So if we drill down a little bit into the individual fund level, PIMCO Total Return Bond has really been the winner out of this. There are massive inflows that we've seen into this bond fund. It's moved up the list a long way, not quite knocking Templeton Global Bond off the list as the largest fund in Europe yet, but definitely making some inroads there.
Masarwah: Absolutely. If we take the PIMCO Total Return bond fund, basically it's a clone fund of the Bill Gross, the US version of the Bill Gross fund with a Morningstar Gold rating. So people bought heavily into this fund. And yes, actually that's a good part of the story, people are not buying indifferently. They've really flocked to the big names, a lot of good names also. So yes, and the Total Return bond fund profited very, very much as did PIMCO as a whole because obviously PIMCO is 'The Bond House' and people are – well, they're buying into what they trust.
Cook: So would you say though if we look forward to the rest of 2013, I mean, we have a lot of people talking about a return to optimism. Do you think that we are going to see a switch compared to what we've seen in 2012 or do you think this trend might last a little bit longer in your opinion?
Masarwah: Well I think if we look at the momentum, then we talked about equity funds being bought into the fourth-quarter. Having said that, these figures are still dwarfed by the inflows into bond funds. So I would very much suspect that this trend is going to continue in the market. It depends on what the markets do. If equity markets will remain friendly, then I think we'll see more inflows into equity funds, but I don't think we are going to see a switch that people will sell bond funds because we still have this macroeconomic picture, which leads people to buy into high yield funds, and I don’t think we are going to see a switch.
Cook: Okay. Thanks Ali. Of course, as you say, we all hope the equity markets will be friendly to us this year, but we will wait and see what happens. Thanks very much for joining me Ali.
Masarwah: Thank you, Holly, very much.
Cook: For Morningstar, I’m Holly Cook. Thanks for watching.