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European Fund Flows: Fixed-Income Funds Draw Record Inflows During First-Semester Slowdown

Intensifying signals of a dovish turn in central bank monetary policy stir bond investments

Valerio Baselli and Ali Masarwah

 

European investors flocked to bond funds with force in the first six months of 2019—sending a net total of EUR 147 billion—as signals of a global economic slowdown intensified in the second quarter. These included: 

  • The inversion of the yield curve in the U.S. in June.  
  • Dovish signals from the U.S. Fed and the European Central Bank, which also spoke to bond investors.  
  • The looming prospect of interest-rate cuts in the U.S. and Europe and a relaunch of the ECB’s quantitative easing program, which motivated European fund investors to splash cash not only on safer government bond funds but on riskier fixed-income funds too.  

Conversely, increasing pessimism for economic growth worldwide and the prospect of sagging corporate earnings solicitated outflows of EUR 45 billion from equity funds in the same period. Flows to allocation funds and alternative funds were negative, with alternative funds suffering an outright rout due to recent subpar performance of many of those hedge-fund mimicking products.  

In all, long-term funds enjoyed inflows of EUR 67.1 billion in the first six months, half of which were posted in June.  

The full picture of flows from the first half of 2019 is shown below. 

Data as of June 30, 2019.

Active versus passive in European fund flows 

Thanks to strong June sales, the first half of the year ended on a conciliatory note for providers of actively managed funds. However, the growth story of index funds in Europe is clear when looking at the trend in the past months and years. At the end of June, passive funds held a 18.1% market share, up from 16.4% one year earlier.  

The chart below shows that equity funds were the starkest example of the advent of passive funds, which enjoyed inflows of nearly EUR 40 billion in the first six months while actively managed equity funds suffered outflows of EUR 86 billion.  

Data as of June 30, 2019.

The chart also shows that active and passive bond funds benefited handsomely from the demand for fixed-income funds in the first half of the year. Active funds gained much more on an absolute basis. However, when adjusting for segment size, inflows to passive fixed-income funds saw higher inflows than their active counterparts, with organic growth rates of 12.7% and 4.6%, respectively.  

For actively managed alternative funds, 2019 is showing to be a poor year. After a short respite in May, they suffered outflows of EUR 8.6 billion in June. So far, these hedge fund vehicles have shed more than EUR 37 billion, which amounts to 8.6% of their AUM as of the end of 2018.  

Fund-level categories: Leaders and laggards 

The top-selling categories in the first semester, shown on the chart below, included: 

  • Global large-cap blend equity funds. After an extremely positive first quarter, flows gradually weakened (only EUR 350 million raised in June, compared to EUR 8.5 billion attracted in February). With EUR 4 billion of new subscriptions, CSIF CH III Equity World ex CH Blue (a pension fund run by Credit Suisse and distributed in Switzerland) was the top seller within the category. 
  • European corporate bond funds. With almost EUR 9 billion of net new sales, June 2019 was this category’s best month for flows on record. IShares Core € Corp Bond ETF took in EUR 3.5 billion between January and June. 
  • Global emerging-markets bond funds, which saw strong demand in the first half of 2019, especially the first quarter. Despite turmoil in some regions and political risks, yield-starved investors have focused on the underlying fundamentals, which are solid in a large part of the emerging-markets debt universe. The main beneficiaries on a product level were Ashmore SICAV Emerging Markets Short Duration Fund and Amundi Emerging Markets Bond Fund, with EUR 2.2 billion and EUR 2.0 billion of net inflows, respectively.

Data as of June 30, 2019.

On the other hand, laggards included: 

  • Multistrategy funds, which marked their thirteenth consecutive month of outflows in June 2019. Redemptions in the semester were motivated to a large degree by investors exiting the SLI Global Absolute Return Strategies Fund, which shed more than EUR 5.5 billion. The U.K.-domiciled version of the strategy has suffered outflows in every month since September 2016, and the Luxembourg version last enjoyed inflows in March 2016. Amundi Target Controllo followed with EUR 2.6 billion of net redemptions. The category’s AUM have fallen to EUR 152 billion from EUR 187.2 billion a year ago. 
  • Eurozone large-cap equity funds, which saw their sixth consecutive negative quarter. The last two quarters have been the worst flow-wise in the last decade (EUR 6.6 billion and EUR 8.0 billion of net outflows, respectively). 

Data as of June 30, 2019.

This blog post is adapted from research that was originally published in Morningstar Direct™ . If you’re a user, you can access the full paper . If not, take a free trial

To see the full analysis, download Morningstar’s European Fund Flows Commentary.

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