Winners, losers and the decline of fear

October 10, 2012

Lipper has released its monthly look at fund flow trends in Europe, and as ever, it throws up some intriguing results.

August saw bond funds again dominate inflows, pulling in a net 20.8 billion euros and just a tad down on July’s record. Stocks funds continued to suffer, as British equity products led the laggards with close to 2 billion euros withdrawn by clients over the month. North American equity funds and their German counterparts also saw big outflows.

Looking regionally, the Italian fund sector continues to show some surprising strength. Net funds sales there topped the table for the second month running. You can see Lipper’s heat map of sales and AuM below:

Now I plainly lack the analytical acumen of the Lipper experts like Ed Moisson, but inspired by their efforts I’ve been running some numbers for fund flows over the year to date, trying to dig a little deeper than the headline figures. There’s no detailed data yet available for September so forgive me for looking back at the eight months to end August, where there is something of a confirmation that investors are losing some of their timidity.

I looked worldwide, but restricted the search to primary equity funds which were at least one year old at the beginning of 2012. The focus was on finding out the fund sectors which saw the most money coming in and going out relative to their total assets under management.

There are two numbers which immediately stand out. One winner; one loser.

First up, Global Income funds have seen net inflows which equated to 19 percent of their latest assets under management, far in advance of the second placed sector over the year-to-date (Philippines equity funds at 11 percent, if you’re asking). This is part of a pretty well-worn trend as investors hunt for yield more widely, particularly in the wake of some dividend shocks in developed markets.

At the other end of the spectrum, there is perhaps a more interesting tale to tell. Net outflows were at very high levels (15 percent of latest AuM) for utilities funds and products focused solely on France, but the biggest loser (relatively-speaking, let’s not forget) were equity funds in the ‘Protected’ category at 19 percent. As the name suggests, these products are there to protect your money before anything else, eking out a return while keeping a firm lid on downside risks.

Now, Lipper’s sage experts would warn me off drawing dramatic conclusions from this; we can’t effectively divine where this money has ended up for a start, and the  ‘Protected’ sector is something of an oddity. But if you combine that result with the utilities withdrawals, it could be seen as evidence that equities investors are moving away from the comforting embrace of capital protection and defensive portfolios.

You can see the data in the chart below; the right hand columns show the net flows as a percentage of total assets. Click on the image for a larger version.

Given continued equity outflows, an exuberant return to risk is clearly still some way off (net outflows from euro zone equity funds in the YTD, for example, equate to 10 percent of latest total AuM). However, Lipper’s latest numbers in the bond sectors do highlight a sustained thirst for high yield products as investors grow ever more impatient of a low-yield environment. These riskier fixed income plays saw 5.7 billion euros of net inflows in August, on the back of a record 7.1 billion euros in July.

The results of my own tinkering led me to look a bit more closely at the whole ‘Protected’ sector, where the equity funds examined above only account for about 400 out of almost 2,000 funds. Deeply unsurprisingly, this sector made hay during the intense beginnings of the financial crisis. From December 2008 to December 2011, net inflows into the entire group (which also includes balanced funds, mixed asset funds, bond funds etc etc) reached close to $5 billion. In the last 8 months, however, they’ve seen about two thirds of that taken straight back out.

It may not be time to hang out the bunting and prepare for a glut of money to flow into all corners of the market, but it might be seen as a sign investors have lost some of the fear.

Oddly, a quick look at the ‘Guaranteed’ sector (work that definition out for yourselves) over the year to date, implies that this apparent jettisoning of lower return safety nets hadn’t extended to the ultra-secure end of the market where our most tremulous investors store their cash. As with ‘Protected’, there were huge net inflows from Dec 2008-Dec 2011 (at close to $50 billion) but the first eight months of this year saw net inflows at about $500 million; a drop in the ocean, but still positive.

It may only be a matter of time though. The Lipper data released today shows that Guaranteed funds — which again count equities funds, bond funds, mixed asset funds etc among their number — were the fifth worst performing sector in terms of sales in Europe during August alone, with close to 700 million euros withdrawn over the month.

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