Morningstar Direct SM Asset Flows Commentary: Europe

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1 April 2013 Data thru March 31 Morningstar Direct SM Asset Flows Commentary: Europe Long-Term Funds Remain at the Top of the List for European Fund Investors in the First Quarter By Ali Masarwah, European Research Team The hunt for yield remains the theme of the year for European fund investors. Long-term open-end funds (excluding funds of funds and feeder funds) posted record inflows of EUR billion in the first quarter--more than any three-month period on record since Morningstar started publishing industry-level fund flow data in Money market funds continued to suffer outflows in the first three months of 2013, indicating that fund investors continue to put yield above safety despite the fact that the eurozone crisis keeps showing its ugly side, as seen in the escalating debt crises in Cyprus in March. Quarterly Inflows by Broad Category Group Over 5 years 150, ,000 50, , , ,000 Q2 08 Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q Allocation Alternative Commodities Convertibles Equity Fixed Income Property Unclassified As Morningstar asset flow data indicates, fixed-income funds have remained in investors focus, enjoying net inflows of EUR billion in March. Allocation funds raked in EUR 8.8 billion, and equity funds saw EUR 4.17 billion in net new money. These three broad asset groups also dominated net fund sales in the first quarter, with alternative, convertible, and property funds trailing by a wide margin and commodity funds seeing outright outflows in the first quarter. As our March data also indicates, the big rotation out of bond funds is still waiting to happen. The demand for equity funds receded for the third month running in March, but bond funds enjoyed a month-over-month increase in inflows. Although investors appetite for equities funds remained muted, they nonetheless continued to invest in risky assets. High-yield bond funds, emerging-markets bond funds, and go-anywhere flexible bond funds remained very much en vogue. Investors preference for debt over equity is also highlighted by the nature of the substantial flows into allocation funds. Within this group, investors favored cautious and moderate allocation funds, which are relatively bondheavy, over aggressive and flexible allocation funds, which are more equity-oriented.

2 Table: European Asset Flows 2013 by broad category Estimated Net Flows ( m) Mar 2013 YTD 12 Mth Allocation 8,796 27,382 51,176 Alternative 1,661 6,748 8,054 Commodities (104) (135) (261) Convertibles 1,019 3,926 5,042 Equity 4,166 30,221 34,144 Fixed Income 15,128 46, ,351 Property 240 1,135 (1,897) Unclassified 20 (435) 510 All Long Term 30, , ,119 Among the Morningstar categories with the highest March inflows, the most-loved categories from January and February continued to see inflows, and the most unloved ones were still shunned for the most part. Demand for EUR cautious allocation, global large-cap value equity, and global bond funds remained high in March. On the other side of the coin, USD and EUR diversified bond and UK large-cap blend equity funds posted the highest outflows in the month. Notable new asset shifts in March included high inflows into US high-yield bond and the somewhat dampened appetite for global emerging-markets bond (local currencies and hard currencies alike) and global emerging-markets equity (which nevertheless continued to see net new money in March). On the other hand, flows into eurozone large-cap equity ended the first quarter in the red on the back of heavy outflows of EUR 717 million in March. This follows a small February outflow of EUR 150 million, and completes a sharp reversal of the EUR 531 million surge into this category in January. The shift is a return to form: Eurozone large-cap equity funds have suffered outflows in 30 of the last 36 months. To learn more about Morningstar Direct Asset Flows, visit us at this link. Data Notes: The figures in this report were compiled on 26 April, Over 24,000 of 30,000 funds that Morningstar tracks from 1,100 fund companies across 29 domiciles are included. Funds domiciled in Sweden are not included because they report assets on a quarterly basis only. BlueBay is not represented due to their disclosure policy. They report assets more than one month in arrears.

3 Table: The 15 Most-Loved Morningstar Categories March 2013 Other Bond 3,014 10,234 44,414 EUR Cautious Allocation 2,349 7,304 13,648 USD High Yield Bond 1,602 2,001 11,891 Global Large-Cap Value Equity 1,557 4,213 8,876 Global Bond - EUR Hedged 1,447 3,300 5,961 Global Bond 1,420 4,008 8,861 Global High Yield Bond 1,359 2,828 10,365 Asia Allocation 1,330 3,133 4,294 USD Flexible Bond 1,207 4,195 12,407 Alt Multistrategy 1,186 2,671 8,085 Alt - Long/Short Debt 1,135 3,565 8,791 Global Emerging Markets Equity 1,021 7,151 18,515 High Yield Bond - Other Hedged 1,014 3,012 11,779 Other Allocation 947 1,902 2,305 Global Emerging Markets Bond 922 3,396 15,761 Table: The 5 Most-Unloved Morningstar Categories March 2013 USD Diversified Bond (1,129) (1,552) 3,823 EUR Diversified Bond (945) (1,510) (357) UK Large-Cap Blend Equity (843) (2,318) 8,134 EUR Corporate Bond (767) (2,361) 4,268 Eurozone Large-Cap Equity (717) (336) (3,213) The Big Names Are Still the Beautiful Ones and the Most Ugly as Well As expected given their huge asset bases, funds from some of the largest firms continue to dominate the top inflows/outflows tables. The return to favor of the Templeton bond flagships remains one of the most noteworthy features of the year with the Templeton Global Total Return Fund topping the list of asset-gathering long-term funds in Europe in March and the first quarter. Global Total Return, run by Michael Hasenstab, carries a Morningstar Analyst Rating of Bronze and outperformed its peers in 2012 and in the first quarter of Another Hasenstab charge, Silver-rated Templeton Global Bond Fund, enjoyed inflows of EUR 685 million in March, the second-highest inflow since August PIMCO GIS Unconstrained Bond and PIMCO GIS Income Fund were strong competitors in March (and in the first quarter overall), posting inflows of EUR 961 million and EUR 695 million, respectively, last month. Standard Life s Global Absolute Return Strategies Fund (GARS) continued to do well, attracting EUR 580 million in March and EUR 1.8 billion in the first quarter. The SICAV version of the fund garnered EUR 437 million in March and EUR 744 million in the first quarter, with the combined figure for the two vehicles (EUR

4 3.29 billion) making the strategy a strong runner-up to Templeton Global Total Return (EUR 4.3 billion) for inflows in the first quarter. This success of the Standard Life funds comes in spite of recent departures at the team. Investors seem to share the view of Morningstar analyst Diane Earnshaw, who noted in her recent report, The strength of the team, even accounting for recent changes, and the flexibility of their investment approach support the award of our Bronze rating. Table: The Most-Loved Funds YTD Templeton Global Total Return 1,727 4,297 6,166 PIMCO GIS Unconstrained Bd 961 2,538 5,665 JPMorgan Asia Pacific Income Fund 868 2,474 3,037 Templeton Glb Bond 685 1,996 1,066 PIMCO GIS Income Fund 695 1,984 2,018 M&G Optimal Income Fund 711 1,945 5,553 Standard Life Global Abs Ret Strat 580 1,804 5,873 PIMCO GIS Emerg Local Bond Fund 363 1,359 2,669 Pictet-Emerging Local Currency Debt 294 1,357 2,688 Gestielle Cedola Più 14 1,295 1,295 Among funds with the largest outflows, the two European PIMCO flagships, PIMCO GIS Global Investment Grade Credit Fund (rated Silver) and PIMCO GIS Total Return Bond Fund (rated Gold), suffered substantial redemptions this year even though their performance has remained solid. Alliance Bernstein s AB American Income Portfolio also continued to be much unloved, but the highest outflows in the first quarter were seen by the Focused SICAV High Grade Bond, which hemorrhaged net EUR 1.02 billion in the first quarter of Table: The Most-Unloved Funds YTD Focused Sicav High Grade Bond EUR (627) (1,018) (698) PIMCO GIS Global Investment Grade Credit (157) (998) 3,097 PIMCO GIS Total Return Bond Fund (558) (943) 6,173 AB American Income Portfolio (174) (686) 5,572 Nordea Dedicated Invest FIS US HY 0 (615) (127) Among asset managers, Franklin Templeton claimed the lead among providers with the highest inflows in the first quarter, unseating PIMCO, on the back of high inflows into its two global bond flagships. In spite of handsome inflows into PIMCO GIS Unconstrained Bond, PIMCO Income Fund, and PIMCO Emerging Local Bond Fund, PIMCO fell back in the first-quarter rankings due to the outflows from its two largest funds. JPMorgan came third in first-quarter asset flow rankings largely due to the high demand for the JPMorgan Asia Pacific Income Fund, which alone accounted for net inflows of EUR 2.47 billion (and which continues to dominate the small Morningstar Asia allocation category).

5 Table: Top 10 Providers YTD Franklin Templeton 3,141 8,895 8,389 PIMCO 2,746 8,446 36,523 JPMorgan 3,456 7,424 13,890 BlackRock 1,093 5,160 13,530 Aberdeen 135 4,318 9,657 DWS 1,663 3,291 3,983 Pictet 913 3,013 6,407 M&G 922 2,522 7,727 BNY Mellon 747 2,504 6,113 Swiss & Global AM 734 2,314 4,942 Turning to the providers with the highest outflows, Scottish Widows, Amundi, and SEB fared worst. While Scottish Widows suffered the most from outflows at its UK equity funds, Amundi s ranking was hurt by flows out of its corporate bond funds. Nordic provider SEB saw significant outflows from its high-yield bond funds, SEK bond funds, and euro corporate funds. Table: Bottom 5 Providers YTD Scottish Widows (485) (1,519) 11,063 Amundi (564) (1,072) (2,563) SEB (112) (909) (2,544) Swisscanto (447) (689) (2,280) Eastspring Investments 64 (668) (139)