Rising anxiety about the predicament of the European economy, jittery credit markets and the exit of several prominent fund managers – Bill Gross being the most prominent – sparked a sell-off in a number of equity and bond fund segments, thus compressing inflows into European open-end funds in September to a relatively modest €20.3 billion. The risk-off mode among European fund investors is shown by outflows of €2.3 billion from equity funds and €4.8 billion out of US and global high-yield bond funds. Inflows into EUR diversified and EUR flexible bond funds offset these outflows from high-yield bond categories and PIMCO´s bond fund range, bringing bond inflows to a relatively moderate €7.1 billion.
Allocation funds topped the list among all broad asset categories in September, raking in €13.1 billion on the back of increasing demand for European cautious and moderate allocation funds. Alternative funds enjoyed inflows of €3.2 billion with €1.6 billion being sent into the alternative multistrategy category – yet another indicator of the high level of demand for broadly diversified asset allocation funds in Europe.
Money market funds did not profit from risk aversion among fund investors. These short-term vehicles suffered redemptions of €8.8 billion as the European Central Bank (ECB) unexpectedly cut interest rates at the start of September. The ECB also announced a purchase program for asset-backed securities to counter deflationary risks for the eurozone economies. On a country level, the highest outflows – €15.9 billion – were seen among money market funds domiciled in France.
Examining the fund flows by Morningstar fund-level categories reveals investors made a large-scale exit from USD and global high-yield bond funds, which suffered €3.1 billion and € 1.7 billion in outflows, respectively. This reflects the sell-off seen in the US credit markets in the last week of September. In spite of this, however, Morningstar credit analyst Dave Sekera believes the US corporate bond market remains richly valued. The Morningstar Corporate Bond Index stood at +115 basis points over Treasuries, 60 basis points tighter than the average level over the past 15 years, and the average spread of the Bank of America Merrill Lynch High Yield Master II Index stood at +400 - much tighter than the historical average of +500.
The sudden departure of Bill Gross from PIMCO grabbed headlines in September, and justifiably so. In addition to the massive outflows seen from the US-domiciled PIMCO Total Return, the exit of the founder of the Allianz subsidiary prompted the large-scale exit of investors from the version of the strategy sold in Europe, PIMCO GIS Total Return Bond Fund. Redemptions of €1.2 billion from the latter were the main driver of outflows from USD-diversified bond funds in September.
Investors also continued to flee European equity funds in September. The exit came at an even quicker pace than August’s selling spree: Of 13 Morningstar categories covering pan-European, Europe ex-UK and eurozone equities, 11 suffered net outflows of combined €4.5 billion. Only the Europe equity income category and the Europe large-cap blend equity category succeeded in taking in new net money. While concerns about Europe entering a recession arguably were the main driver behind this, the stampede seen in the Europe flex-cap equity category is explained by the exit of fund manager Francisco Paramés from Spanish Bestinver Asset Management.
The exit of longtime fund manager Julie Dean prompted outflows of net €660 million out of Schroder UK Opportunuities - formerly Cazenove UK Opportunities, which made up the lion´s share of September redemptions out of UK flex-cap equity funds. The fund has since been placed under review by Morningstar fund analysts.
Turning to the categories with the highest inflows, EUR diversified bond funds enjoyed yet another positive month with inflows of €2.7 billion - the highest level of inflows in any one-month period on record.
