July 2012 Data thru June 30 Morningstar Direct SM Asset Flows Commentary: Europe Europe Open-End Funds Fear over Greed Drives Second-Quarter European Asset Flows by Dan Lefkovitz, European Research Team Asset flows to European funds continue to react predictably to the ongoing eurozone crisis and its attendant market turbulence. The liquidity-fueled market rally of 2012 s first quarter lifted investor confidence and attracted money into funds. Then, with instability in Europe, as well as bad news from the US and China sending markets into fits, European investors withdrew 4.2 billion from long-term funds in the second quarter; June saw 1.2 billion worth of net redemptions from longterm funds. Estimated Net Flows Mil June 2012 Q2 YTD 2011 Allocation 395 2,456 9,421 5,379 507 Alternative (1,111) (3,289) (913) (2,154) 267 Commodities (208) (598) (299) (452) 22 Convertibles (307) (1,325) (320) (4,953) 38 Equity (7,518) (21,106) (17,565) (69,816) 1,554 Fixed Income 8,796 21,139 60,254 (43,742) 1,341 Property (1,260) (1,517) (652) (2,841) 105 All Long Term (1,213) (4,240) 49,928 (118,580) 3,834 Money (19,250) 10,153 18,303 (5,708) 941 Money market funds cushioned the blow for the European funds industry in the second quarter. Roughly 10 billion of investor capital flowed into short-term funds, perhaps reflecting a reallocation from long-term funds. But a surprising 19 billion left short-term funds in June, the worst month for the asset class since June 2011. More than half of the outflow came from Morningstar s EUR money market short term category, with funds offered by JP Morgan and BNP Paribas especially hard hit. Meanwhile, EUR money market also saw 3.6 billion in outflows in June. Meanwhile, a raft of asset managers, including BlackRock, HSBC, and State Street have restricted inflows into their short-term funds in the wake of the ECB lowering rates to protect yields from being diluted by new investor money. To learn more about Morningstar Direct Asset Flows, visit us at this link. Data Notes: The figures in this report were compiled on July 23, 2012. Over 23,000 of 30,000 funds that Morningstar tracks from 1,100 fund companies across 29 domiciles are included. Between 1 bn and 8 bn of AUM from these groups are not included because assets for some funds were not reported by the publishing date: SEB, Allianz, Carnegie, Fidelity, Amundi, T. Rowe Price, Neptune, and RREEF. BlueBay is not represented due to their disclosure policy. They report assets more than one month in arrears.
Equities Remain Out of Favor Predictably, equity funds were the hardest hit in the second quarter, after having enjoyed net inflows of 3 billion in the first quarter. European investors withdrew more than 21 billion from the broad asset class in the second quarter, with roughly 7.5 billion of those redemptions coming in June. Despite clear jitters, investors in European funds are developing stronger stomachs. The outflows in 2012 s second quarter were not as severe as those witnessed in the second half of 2011 or the dark days of 2008. Organic growth rate = flows / beginning net assets. It measures the rate at which the asset class grew (shrank) due to investor decisions. appreciation (depreciation) is excluded from the calculation. At a category level, it wasn t surprising to see Morningstar s eurozone large-cap equity peer group leading the board in stock fund outflows, with nearly 2.7 billion exiting in the second quarter and 778 million leaving in June. Nor was it shocking to see the Europe large-cap value equity, Europe large-cap blend equity, France large-cap equity, and Germany large-cap equity categories in net redemptions for the quarter and for June. More interesting were the 2 billion in outflows from Morningstar s Asia ex-japan equity category over the second quarter. The same category had attracted roughly 1.2 billion in the more bullish first quarter of 2012. Morningstar s China equity category made the same shift from inflows to outflows between the first and second quarters. No doubt, investors fear a Chinese slowdown. Equity Categories Ranked by June Outflows Mil Asia ex Japan Equity (875) (2,086) (891) 40 Eurozone Large-Cap Equity (778) (2,673) (3,632) 57 US Large-Cap Blend Equity (755) 95 (299) 83 France Large-Cap Equity (522) (1,290) (2,618) 25 Europe Large-Cap Value Equity (424) (1,504) (2,904) 25 Global Flex-Cap Equity (387) (519) (602) 19 Global Large-Cap Blend Equity (374) (1,656) (543) 182 Japan Large-Cap Equity (351) (1,281) (1,359) 30 China Equity (347) (1,626) (1,435) 22 Europe Large-Cap Blend Equity (276) (1,085) (1,510) 89
The Bond Boom Continues Meanwhile, investor appetite for bond funds remains insatiable. Fixed-income funds enjoyed more than 21 billion in inflows in the second quarter, nearly 9 billion of that coming in June. At a Morningstar category level, flows were led by other bond, a miscellaneous grouping. The other bond category contained Europe s most popular fund for the quarter, Alliance Bernstein American Income Portfolio. That fund attracted strong flows from Asia-based investors who clearly favor its exposure to a perceived safe-haven currency. Other bond also contains a number of target-maturity bond fund sold by Italian banks to investors eager to shield their euro savings over a defined time frame while receiving a small but steady income stream. Otherwise, as seen in the below chart, investors continue to search for yield outside the eurozone with their bond funds. Fixed Income Categories Ranked by June Outflows Mil Other Bond 2,628 5,101 11,091 77 Global Bond 1,496 3,412 2,947 73 USD Diversified Bond 1,050 2,030 2,392 28 Global Emerging s Bond 920 1,858 5,277 41 USD High Yield Bond 769 2,406 6,440 33 Global High Yield Bond 734 514 2,966 33 GBP Corporate Bond 697 844 2,916 78 USD Corporate Bond 691 1,890 3,356 17 Global Emerging s Bond Local Currency 537 (274) 1,916 37 USD Flexible Bond 521 1,388 3,313 17
Allocation Funds Balance Fear and Greed Allocation funds continue to benefit from uncertainty and investor focus on capital preservation over return maximization. The most popular balanced fund for the second quarter and the year to date was M&G Optimal Income, which carries a Morningstar Analyst Rating of Silver. Carmignac as a house has also benefitted from interest in asset allocation, with three popular allocation funds, including new Carmignac Portfolio Emerging Patrimoine, in the hot emerging allocation category. Another in-favor fund this year has been Baillie Gifford Diversified Growth; its June inflow of 367 million swelled its asset base beyond 2 billion. Allocation Funds Ranked by June Carmignac Patrimoine 375 616 1,162 26,790 Baillie Gifford Diversified Gr Fd 367 587 1,058 2,154 M&G Optimal Income Fund 345 1,004 2,652 10,067 Baring Dyn Asset Alloc I GBP ACC 279 795 1,049 6,147 Newton Real Return Fund 83 521 1,036 7,389 FvS Strategie Multiple Opportunities 77 371 928 1,652 Deka-Euroland Balance 63 247 538 1,790 Invesco Balanced-Risk Allocation Fund 58 366 1,122 1,649 Troy Trojan 55 216 459 2,601 Fondo Alleanza Obbligazionario 48 (58) (116) 3,802 Meanwhile, Morningstar s alternatives broad asset class saw more than 3 billion of investor withdrawals in the second quarter, with roughly 1 billion coming in June. The broad asset class includes the guaranteed funds category, which, upon closer examination, is the source of the redemptions. The list of most heavily redeemed funds for the quarter includes many products offered by Spanish banks, so it s likely that investors fear the banks ability to make good on those guarantees. Guaranteed Funds Ranked by June Estimated Net Outflow Mil AC Euribor Mas 50 Garantizado FI (373) (373) (378) 112 BBVA Europa Garantizado FI (65) (66) (67) 132 FonCaixa Estabilidad FI (64) (108) (193) 2,350 BBVA Plan Rentas 2016 B FI (61) (67) (71) 105 Eurizon Focus Garantito Giugno 2012 (47) (76) (105) 150 Sabadell BS Garantía Extra 14 FI (42) (53) (53) 14 BBVA Extra Tesoreria FI (35) (111) (72) 762 BBVA Solidez V FI (30) (31) (50) 846 Lyxor Formule Progression 1 (29) (271) (414) 220 Lyxor Formule Progression 2 (29) (271) (414) 220
On the positive side of the alternatives ledger, Standard Life Global Absolute Return Strategies attracted more than 1 billion over the course of the quarter, swelling the asset base of the UKdomiciled fund beyond 14 billion. Meanwhile, the Luxembourg version of the fund, launched in January 2011, has grown to more than 2 billion. Europe s Rich Get Richer, but Not as Rich as Those in America Standard Life GARS is the sixth-largest long-term fund in Europe. Europe s top five all enjoyed positive flows in June, and all but the largest, Templeton Global Bond, were positive for the second quarter. Still, June marked Templeton Global Bond s first month of positive flows since August 2011. The fund, which carries a Morningstar Analyst Rating of Silver due to our analysts conviction in its long-term prospects, has seen a rebound in performance, and asset flows have finally caught up. Gold-rated allocation fund Carmignac Patrimoine has also rebounded in performance; June marked its strongest month of inflows ( 375 million) since January 2011. By far the fund s largest share class A EUR Acc has returned an impressive 6.68% on average over the past five years through 30 June 2012, thanks to its capabilities in tactical asset allocation. But when Carmignac misfires, investors can lose faith. Thanks to investors mistiming their purchases and sales of the fund, its Morningstar Investor Return over the past five years is a respectable, but still lower 5.13%. PIMCO GIS Global Total Return Bond enjoyed an extremely strong quarter of 2 billion in inflows, pushing its asset base beyond the 20 billion threshold. It s easy for observers in the fund s US version, which has $263 billion in assets, to ignore the fund s Dublin-domiciled version. Name 06-2012 Share Basis: Total ($Mil) Share% Name 06-2012 Share Basis: Total ( Mil) Share% PIMCO Total Return Fund 263,384 3.064 Templeton Glb Bond 32,535 0.849 Vanguard Total Stock Index Fund American Funds Growth Fund of America 168,863 1.964 Carmignac Patrimoine 26,790 0.699 115,561 1.344 PIMCO GIS Total Return Bond Fund 20,274 0.529 Vanguard Institutional Index Fund 109,745 1.277 Templeton Global Total Return 18,969 0.495 Vanguard Five Hundred Index Fund American Funds Europacific Growth Fund Vanguard Total Bond Index Fund Fidelity Contrafund Fund 81,266 0.945 American Funds Capital Income Builder American Funds Income Fund Of America 106,566 1.240 AB Global High Yield Portfolio 15,781 0.412 94,422 1.098 Standard Life Global Abs Ret Strat 14,485 0.378 93,502 1.088 IP High Income 14,430 0.376 PIMCO GIS Global Investment Grade Credit 14,033 0.366 76,351 0.888 Templeton Asian Growth 12,687 0.331 71,698 0.834 Deka-ImmobilienEuropa 11,826 0.308 Vanguard Total Intl Stock Idx Fund 67,539 0.786 IP Income 10,994 0.287 American Funds Capital World Grth & Inc 67,383 0.784 M&G Optimal Income Fund 10,067 0.263 Franklin Income Series Fund 64,364 0.749 BGF Global Allocation Fund 9,966 0.260 Vanguard Wellington 61,176 0.712 Aberdeen Global Emerging s Equity 9,597 0.250 Templeton Global Bond Fund 59,889 0.697 hausinvest 9,439 0.246 Total No of funds: 6,159 8,596,062 Share % for Top 15 Total No of funds: 22,888 3,833,832 Share % for Top 15 % of funds > $100mn= ~36% 17.470 % of funds > 100mn= ~70% 6.048
Index Funds and Vanguard Gain Ground The top-selling equity fund in June was Vanguard FTSE UK All Share Index, with 859 million in inflows. Also among the top 20 equity funds in June were Vanguard FTSE Developed Europe ex UK Equity Index, Vanguard Global Stock Index, and Vanguard Pacific Ex-Japan Stock Index. These passive funds are likely benefitting from the move away from adviser rebates in the UK market and increased focus on controlling fees in a low-return environment. But as discussed in May s European asset flows commentary, heavy flows to passive UBS funds show that the trend extends beyond the UK. KLP AksjeGlobal Indeks also enjoyed its strongest month on record. Index funds still represent just 5.3% of industry assets in Europe (compared with 15% in the US) but passives attracted 1.3 billion in the second quarter, while active funds saw 5 billion in redemptions. Low-cost funds hold added appeal in a low-return world. Research by Morningstar and others shows that low-cost funds tend to outperform. Vanguard, whose steady climb to largest US asset manager is discussed in Morningstar s US Asset Flows commentary for June, is also taking market share in Europe. The 2 billion worth of inflows into its European funds for the first half of 2012 made it Europe s fifth-most-popular fund house this year (excluding money market assets). But with 28 billion in assets in its European fund ranges, it is still a shadow of UBS ( 133 billion) and PIMCO ( 81 billion). European Fund Groups Ranked by AUM UBS 18 3,225 4,526 133 BlackRock (497) (702) 505 125 Franklin Templeton 56 (255) 1,091 110 BNP Paribas (725) (3,315) (5,497) 102 DWS 15 (306) (498) 93 Fidelity (555) (2,227) (1,711) 92 Union Investment (87) 718 2,251 86 PIMCO 2,653 7,229 12,978 81 Schroders (583) (2,182) (2,826) 76 Amundi (1,181) (2,476) (1,956) 75