Hidden gyrations underpin 2017 global fund flows - Financial Times

22/12/2017

Hidden gyrations underpin 2017 global fund flows

Investors poured $640bn into stock and bond funds, up more than tenfold

Bond funds hit by biggest outflows since election

Eric Platt in New York

Financial markets will be best remembered in 2017 for their lack of volatility. Global stocks never fell into the red and investors comfortably shook off the threat of higher interest rates.

But beneath the surface, gyrations were afoot. Bets at the start of the year that a US tax overhaul would buoy corporate profitability, and in turn, lift parts of the stock market, subsided even if Congress and the White House did manage to pass the bill in recent days. Those investors who called time on the great bond rally, which saw yields hit historic lows last year, also proved too early.

Equities versus bonds

Investors poured $640bn into stock and bond funds this year, up more than tenfold from a year earlier when the US election and the Brexit vote sent shockwaves through markets, according to data provider EPFR. The relative placid trading environment in 2017 saw valuations rise to uncomfortable levels for some investors.

Fixed income funds curried slightly more favour this year, attracting nearly $350bn of the overall figure. Central bank stimulus from the European Central Bank and Bank of Japan, including multibillion-dollar monthly bond-buying programmes run by both institutions, was one of the key factors buoying demand.

The relentless competition from exchange traded funds continued to press on traditional mutual fund managers in 2017. The passively managed funds, which simply track big indices, attracted $592bn across fixed income and equity vehicles this year, dwarfing the $51bn added to traditional funds tracked by EPFR.

While fixed income mutual funds still held the lead over bond ETFs, pulling in $60bn more over the year, the scales were tipped in the other direction for stock funds. Equity ETFs enjoyed $448bn of additions this year, more than double the haul for the asset class in either 2015 or 2016.

By contrast, stock mutual funds suffered $153bn of redemptions. The shift into passive vehicles continued despite better performance from actively managed portfolios.

Emerging market surge

In the weeks after the US election, emerging market stock and bond valuations slid in anticipation of protectionist policies from Donald Trump. Investors pulled nearly $30bn from the asset class and currencies, such as the Mexican peso that were seen vulnerable to a tough new trade stance from the US, declined.

Yet just over a year later, EM investors are poised for one of their best years since the financial crisis. The MSCI EM index has climbed 30 per cent this year. EM bonds have returned 8.1 per cent, separate data from Bloomberg Barclays Indices show.

The rally has been fuelled in part by steady investor inflows to the asset class. EM bond funds have counted $67bn of further capital this year. Portfolios investing in EM stocks have enjoyed nearly $61bn.

b Michele, JPMorgan Asset Management’s global head of fixed income, put some of the strength to the stability of China, which had sent ripples through the market at the end of 2015 and start of 2016. And while attention often centred on Venezuela, EM were broadly expected to eke out their fastest economic growth since 2014, according to the International Monetary Fund.

International and US equities

Emmanuel Macron’s victory in France’s presidential election in May, which quashed fears that a populist anti-euro party would take power, sent investors scrambling into stock funds across the continent. European equity funds registered $39bn of inflows this year, reversing part of the $100bn of redemptions that hit the asset class in 2016.

“We’ve rotated into international [stocks],” Sebastien Page, the head of asset allocation at T Rowe Price, says. “Outside of the US, you are earlier in the business cycle, you get cheaper valuations, you still have much more accommodative central banks . . . and you have fairly good momentum in terms of earnings growth and returns.”

Investment grade debt proves alluring

Central banks have pumped $14tn into global financial markets since the crisis, pushing asset managers into riskier investments.

Over the past year that manifested itself in the addition of some $277bn to investment grade bond funds. JPMorgan’s Mr Michele notes that many of the investors trading out of government bonds shifted into US corporates, helping suppress yields on the debt.

“Every time a central bank was doing a round of quantitative easing, the holders of government bonds overseas would sell those bonds to the central bank, take that money and come into the US market and buy at much higher yields,” he says.

Risk premiums on high-quality US corporate debt now sit at the lowest level in more than a decade, according to ICE BofAML Indices. But the buying has not been indiscriminate.

High-yield bond funds, judged to be riskier by the main rating agencies than their investment grade peers, have suffered outflows over the course of the year.