Holly Cook: I'm Holly Cook and I'm joined today by Dan Lefkovitz. He is going to talk us through Morningstar's Pan-European quarterly asset flows data.
Dan, thanks very much for joining me.
Dan Lefkovitz: Thanks for having me, Holly.
Cook: So we know that in 2011 we saw a huge amount of money flowing out of the funds industry, what have we seen so far in the first quarter of 2012?
Lefkovitz: It was a very strong quarter in terms of flows. Investors seem to be a little bit more enthusiastic about putting money into funds, which isn't surprising given that markets have been fairly buoyant in 2012 and it's been a relatively quiet period for the eurozone crisis.
Cook: And has money been flowing fairly between equities and bonds?
Lefkovitz: I wouldn't say money has been evenly distributed between fixed income and equities. Fixed income has really dominated flows so far in 2012.
Cook: So this is European data… We know that the eurozone problems are far from resolved, so what's this bonds data telling us?
Lefkovitz: If you dig into the Morningstar asset flows data, you see that the money is not going to government debt. It's really going to corporate debt, especially high yield and also emerging market debt. I think investors see corporates as a lot healthier than governments; profit margins are high, balance sheets are strong, default rates are low and the emerging world seems to be healthier than the western world.
Cook: So, you mentioned corporate debt, emerging market debt and high yield debt, are investors seeing these areas as alternative to equities?
Lefkovitz: Very much so. There is also a real thirst for yield out there. Investors probably see these asset classes as something of a way station between equities and bonds.
Cook: We know that investors have a tendency to make good investment decisions, but sometimes at inopportune times, should we be concerned about what this data is telling us?
Lefkovitz: Yeah. Our asset flow data shows investors tends to get very excited when markets are strong and returns are high and then they get discouraged when times are tough. So a lot of money came into the funds industry in 2007 just in time for the crash of 2008, investors pulled their money out just before the rebound of 2009, and so on and so forth. Interestingly, one of the most popular funds in Europe over the past several years, in fact globally, is Templeton Global Bond. The fund hit a rough patch in 2011 and money has been coming out of the fund--over $1 billion left the fund in 2012. So the Morningstar investor return, which adjusts the total return for the flows in and out of the fund, shows there is a significant gap between the investor return and the total return. So investors haven't really enjoyed all of the fund’s stated total return.
Cook: So that is an important lesson in herd mentality there.
Lefkovitz: Absolutely.
Cook: How about on the equity side, any bright spots?
Lefkovitz: Emerging markets continued to be very popular with investors, so Aberdeen Global Emerging Markets fund got a lot of inflows in 2012 so far, as well as in 2011. Dividend funds, which goes to the thirst for yield and are perceived to be stable, have gotten a lot of inflows, so M&G Global Dividend; Morgan Stanley Global Brands is another popular fund.
Cook: So you mentioned Aberdeen Global Emerging Markets fund, we know that's already a large fund. Those assets flowing in there, is that going to have any impact on the manager's abilities to do an effective job?
Lefkovitz: The asset base is definitely a concern. It's something our fund analyst team is keeping a very close eye on, at this point that fund maintains an analyst rating of Gold, reflecting our very strong conviction in prospects. But yes, a large asset base in an illiquid asset class is always a cause for concern and monitoring.
Cook: So it sounds like the data is telling us that investors are a little bit more confident but in their search for yield they’re having to go to slightly higher risk areas?
Lefkovitz: That's right and they are not quite confident enough to come back into equity funds.
Cook: Well, thanks very much for joining me, Dan. Very interesting insights.
Lefkovitz: Thanks for having me.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
