Buoyant equity markets, a continued decline in volatility, and a complacent bond market seem to have heartened European fund investors at the start of the year. Long-term funds posted record inflows of €45.7 billion in January, the highest level seen for European funds on record. (Morningstar asset flow data at the industry level begins in 2007.)
Investors seem to perceive that the eurozone crisis is petering out
The three large broad fund asset classes—equities, bonds, and allocation—all enjoyed sizable inflows, but investors also sent substantial sums into alternative and convertible bond funds, with the latter seeing the highest level of inflows since July 2009. All asset classes and very nearly all of the top 10 open-end fund providers--except BNP Paribas--experienced positive inflows in January.
Asset Flows in European Open-End Funds in January 2013
(Click the above image to enlarge.)
Although the level of inflows seen in January is unprecedented for a one-month period, the European fund market arguably has displayed more continuity than meets the eye. For one, January has traditionally been a friendly month for fund providers with lump-sum investments often seeing spikes at the start of a new calendar year. On top of that, more and more investors seem to perceive that the eurozone crisis is petering out. This has translated into an increasing willingness to buy risky assets since the autumn of 2012. This trend, which most notably includes rising flows into equity funds, has been gathering momentum since September 2012.
Lurking Threats
Given the uneasy equilibrium between snail’s-pace reforms in the eurozone and a steadily weakening European economy, the possibility of the risk-off mode returning in the coming months should not be ruled out.
“With so many threats lurking and the ever-present risk that something strikes from left field, staying vigilant (or fearful as others are greedy, as Warren Buffett would say) makes a lot of sense to us,” notes Morningstar bond strategist Dave Sekera.
However, Morningstar data indicates that European bond fund managers have systematically been increasing their exposure to lower-tier ratings. According to Morningstar Direct, the share of bonds rated AAA and AA in the 600-odd euro and global bond funds with full portfolio holdings available fell from 62% to 37% between August 2011 and December 2012. On the other hand, the weighting of bonds rated of BBB increased from 10% to 34%.
To find out which fund categories were the most-loved (and least-loved) in January, read "The Most-Loved Fund Categories".
