European investors continued to draw assets hastily out of fixed-income funds in September at a pace not seen in years. After suffering outflows of €17.6 billion in August, the asset class lost another €16.3 billion in September. Rising credit spreads hurt corporate bonds and worries of a stark slowdown in China weakened emerging-markets bonds, resulting in the largest quarterly outflows for European fixed-income funds since the financial crisis of 2008.
Worst-hit during the quarter were emerging-markets bond funds of all types, with funds focused on renminbi bonds seeing the highest outflows in relation to their size. Developed-markets fixed-income funds with exposure to corporate bonds also experienced sharp outflows as credit spreads rose globally.
In September, outflows were mostly concentrated in fixed-income categories, whereas allocation and alternative funds continued to draw in new money, albeit at a slower pace than earlier in the year. Even equity funds saw inflows after surrendering more than €20 billion in August’s market turbulence. Altogether, European long-term funds saw outflows of €6.2 billion in September. The rise of indexing continued in September, though at a slightly slower pace than in August.
Long-term index funds took in €1.6 billion of new assets, most of it landing in large-cap equity funds, while non-index funds were skimmed by outflows of €7.6 billion. Among European-domiciled funds, Italian asset managers continued to profit from a shift in investors’ preferences from deposits, government bonds, and real estate to mutual funds, especially in allocation categories.
Led by Eurizon, which has benefitted from selling fixed-term funds, the organic growth rate for Italian-domiciled long-term funds reached 8.9% for the year to date in September, highest among the 10 largest markets in Europe.
Fund-Level Categories
Looking at fund-level categories, September saw the continuation of trends that have been visible for several months. Alternative fund categories profited from investors’ aversion to fixed-income categories; the Alt – Multistrategy Morningstar Category led the way with €1.5 billion in inflows, increasing the category’s organic growth rate for the year to date to an impressive 32.9%.
Other fund types also benefited from investors’ stampede from fixed-income; large-cap equity funds across the developed world, especially those investing in Europe, stood out in this regard.
Fixed-income markets were divided in September. Government bonds profited from declining interest rates after the U.S. Federal Reserve’s decision on September 17 to postpone raising the federal fund rate, whilst credit spreads rose as plummeting commodity and oil prices weighed heavily on the energy and metals and mining sectors. This led to outflows in several fixed-income categories with exposure to corporate credit risk. Emerging-markets bonds were even worse-hit as worries over China’s economic development continued to mount.