After a remarkably difficult 2022, fixed-income funds look to be back in favour with Europe’s investors as inflation fears begin to ease and yields improve, according to Cerulli Associates.
Fixed-income funds in Europe saw net inflows of EUR49.4 billion (USD53 billion) in the first two months of 2023. This follows net outflows in most months of 2022 and a 14.5 per cent decline in fixed-income assets under management (AUM) over the year.
“In 2022, fixed-income funds failed to provide European investors with much of a cushion as stock prices fell. Although investors had anticipated higher inflation and central bank responses, they were not well prepared for the impact of the Russia-Ukraine conflict on energy and food prices. A series of rate rises across the EU, the UK, and the US left no bond sector safe from falling values,” says Fabrizio Zumbo, director of European asset and wealth management.
However, during the first two months of 2023, fixed-income funds in Europe attracted net inflows of EUR49.4 billion, dwarfing the net inflows of EUR27.2 billion gathered by equity funds over the same period. Net inflows of EUR9.7 billion made January 2023 the best-selling month ever for bond ETFs.
Some 27 per cent of the asset managers named fixed income their top sales priority over the next 12 to 24 months, only slightly below the 29 per cent that singled out equity. The same survey found that the bond outlook in key European markets is less of a worry for European distribution heads than the equity outlook.
Flows for both bond ETFs and index funds were resilient in 2022, Cerulli reports. Asset managers in Europe anticipate growth for index fund and ETF AUM with a third (32 per cent) expecting index fund growth to exceed 10 per cent over the next 12 to 24 months and a quarter (27 per cent) expecting the same for ETF growth.
Asset and wealth managers express mixed sentiment toward emerging market bond funds. “Some believe that Chinese and other Asian emerging market debt now offers an appealing risk-return profile, with the risk of defaults low relative to the high yields offered. Others are more cautious, preferring to delegate investment calls regarding emerging markets to global bond fund managers. Volatile flows reinforce the idea that sentiment around the emerging market fixed-income sector is mixed,” says Zumbo.