Safe as ... emerging markets

European investors, according to Lipper FMI's monthly statistical reality check released Monday 14 June, are flocking into bonds just as they did in 2005. The difference this time is that the bond categories of choice are emerging markets, global currencies and high-yield, whereas in 2005 investors favoured long European bonds.

Flows to bond funds exceeded €18bn in the review period of April 2010, the third highest level ever recorded by Lipper FMI. Bond sales so far this year have already reached €61bn, equivalent to 70% of last year's full-year total, and sales are marginally higher than they were by April in 2005, when the bond sector chalked up its record year with net sales of €150bn.

The different choices that investors have made in terms of bond categories in 2010 compared with five years ago reflect different motivations for investing in bonds in the first place. “In 2005, new accounting standards, the avoidance of the European savings directive and strong interest in LDI combined to boost fund flows,” says Lipper FMI. “This time, low interest rates are driving bond enthusiasm.”

Emerging markets also headed equity inflows in April 2010, though at €4bn these were much more muted than bond flows. As the debt crisis in Greece and other southern European countries deepened, investors appeared to turn away from the European homeland. The least popular sectors in April 2010 were equity Europe and equity Euroland, which both saw net outflows of €1.9bn, followed by short-term European bonds with net outflows of €1.8bn.

Enthusiasm for emerging markets may partly be explained by their being “arguably safer than their core European counterparts”, says Lipper FMI, reflecting a view that emerging-markets fund managers have been peddling for some time. The question now, says the London-based research house, is “whether the crisis in Greece and its southern European neighbours will bring this bond trend shuddering to a halt and put money market funds back into the limelight or result in an even more emphatic shift into global and emerging market bond funds”.

As might be expected in this type of environment, the top-selling group in April 2010 was Franklin Templeton with net flows of €4bn, a whopping €3.5bn of which came from bonds funds. On the equity side, the recently hatched and exotically named Amundi Asset Management topped the table with €800m of net sales. However, the best selling equity fund was an exchange-traded fund, ETFLab’s DAX ETF on the German stock market index.

Fiona Rintoul, editorial director
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