Holly Cook: From Morningstar, I am Holly Cook and I'm joined today by Dan Lefkovitz. We are going to talk through Morningstar's fund flow data and see what's been happening in the first half of this year.
Dan, thanks very much for joining me.
Dan Lefkovitz: Thanks for having me, Holly.
Cook: So we talked last time about three months ago. At the time markets had been rallying, investors were on a bit of a high. What's changed in the last three months?
Lefkovitz: Yeah. There has been a real reversal. So the second quarter, as we know, was a very difficult period for the eurozone. There was bad news coming out of the US and China as well. Markets gave back a lot of their gains from the first quarter and investor sentiment also turned negative. So we saw very pronounced outflows in the second quarter especially from equity funds. They lost over EUR 21 billion in assets across the second quarter.
Cook: Okay, let's go into that a little bit more, any particular sectors or regions on the equities side?
Lefkovitz: Yeah, well European equities remain very out of favour. Interestingly, our fund analysts, Morningstar fund analysts, in speaking to portfolio managers hear repeatedly that there's a lot of value out there in European shares. They are so beaten down, so unloved. But what's interesting is that in the second quarter there were a lot of outflows from emerging markets funds which is a reversal from the first quarter. So we saw Asia ex-Japan and Morningstar's China Equity category lose a lot of investor assets, probably due to risk aversion as well as the bad news coming out of China.
Cook: And how about on the bond front, are they still going strong?
Lefkovitz: Bonds have gone very, very strong, EUR 60 billion in total in inflows across the first half of this year. Investors are really hungry for yield and are looking for bonds, especially outside of the eurozone, outside of government debt and are more focused on corporate debt.
Cook: So they are still going to those sort of higher risk areas in order to try and get that extra yield given the low interest rate environment.
Lefkovitz: That's right. There's a real hunger for yield out there and higher-yielding bonds are seen perhaps as something of a way station between equity and debt.
Cook: And how about specific strategies or funds, are there any that really stand out?
Lefkovitz: Yeah. Well, Alliance Bernstein American Income, a US dollar-denominated fund, was the most popular fund in the second quarter. PIMCO Total Return gained over EUR 2 billion in inflows, pushing the fund over the EUR 20 billion barrier. It's still...
Cook: This is the European version of their US fund...
Lefkovitz: That's right. It's a Dublin-domiciled version of the Bill Gross strategy. It's the third largest fund in Europe, but it's a fraction of the size of the US version which has $260 billion in assets. This is illustrative I think of the fact that the European fund universe remains much more fragmented [than the US universe]; fewer big behemoth funds and a lot more small funds.
Cook: And how about actual kind of allocation and multi-asset strategies, I think we've seen a lot of money going to these areas too?
Lefkovitz: That's right. This remains a very, very popular asset class. Investors like balanced funds where the fund manager can allocate capital across bonds, stocks and different asset classes. So, Carmignac as a house has benefited a lot from this trend, Carmignac Patrimoine, their flagship strategy, has been a very popular fund. Interestingly, this fund hit a rough patch in 2011 and experienced a lot of outflows. So the Morningstar Investor Return, which adjusts the total return for the inflows and outflows, is quite a bit lower than the total return.
Cook: So that classic situation of people making investment decisions at the wrong time.
Lefkovitz: That's right. People give up on funds when they are down. They get excited about funds when they are hot. They often show bad timing.
Cook: And so the strategies that are attracting money seem to show that whereas perhaps when we last talked people had enough conviction to put their money in emerging markets or in some high-yield bonds for example. Now, they are passing their money over to the professionals who have the remit where they can be flexible to sort of stick the money wherever they see fit.
Lefkovitz: Absolutely. Allocation funds benefit from uncertain times. A lot of these funds are also benefiting from an investor focus on capital preservation over return maximisation.
Cook: And that capital preservation point as well is presumably why we have seen money flowing to the low-cost funds as well?
Lefkovitz: That's right. That's been one of the big trends of 2012—flows into passive strategies. Vanguard has been a big beneficiary. It's the largest US asset manager, but is well outside the top 25 in Europe, but it has been among the most popular fund houses in Europe so far in 2012. In June, the Vanguard FTSE All-Share tracker was the most popular fund. Low-cost funds are benefiting from the move away from adviser rebates in the UK, but this is a pan-European phenomenon. We've all seen passive strategies by UBS gather inflows. In a low return environment, people are focusing on controlling what they can and low-cost funds have a real appeal. And we think this is a good thing for investors. Morningstar research has shown that low-cost funds enjoy an inbuilt performance advantage.
Cook: So when you are looking to try and get as much return as you possibly can in a low-yield environment, those fund fees really matter.
Lefkovitz: That's right, that's right. There's so much uncertainty in investing, why not control what you can which is the fees that you pay on the fund.
Cook: So to kind of summarise the whole of the second quarter, essentially we are seeing a lack of conviction, a move to try and put money in the hands of those managers who can be flexible and perhaps make broader investment decisions, and also a focus on the low-cost funds as well.
Lefkovitz: That's right. There's definitely been risk aversion in the second quarter in response to bearish markets. But I would say that the outflows from equity funds were not as pronounced as what we saw in the second half of 2011 or in the dark days of '08.
Cook: Well, thanks very much, Dan. I look forward to catching up in a few months time and seeing what's changed.
Lefkovitz: Thanks for having me Holly.
Cook: No problem. From Morningstar, I'm Holly Cook. Thanks for watching.
