Cherry Reynard reveals last month's most popular asset classes
October saw a tentative re-discovery of risk appetite among global investors, as they finally shook off their long-running preference for fixed interest and re-embraced equity. This ends a lengthy period when investor behaviour has not kept pace with stock market returns.
Although many of the worries that have held back markets remain – the eurozone crisis, the fiscal cliff, weakening growth in China – the catalyst for re-embracing risk assets was a series of better than expected economic releases from the UK and US, plus indications from the Chinese government the economy had turned a corner.
Bonds in favour
As recently as the middle of October, bond funds were still in favour. EPFR reported that they posted their second biggest weekly inflow for the year to date during the week to 10 October, while money continued to flow out of US equity funds. But even at this point, European equity funds had started to draw inflows and emerging market demand appeared to be picking up.
Where did the smart money go in October?
This trend accelerated towards the end of the month. Global investors put money into US equity funds and pulled out of money market funds in the last week of the month as part of a renewed enthusiasm for equities. US stock funds attracted $1.06bn, the first time they had recorded inflows since the Federal Reserve announced its last round of quantitative easing. However, there was no sign of bond funds waning in popularity and they still attracted £5bn in new cash.
A similar re-embracing of risk was seen in Europe. Equity funds saw their first positive month since February, taking net inflows of €1.91bn, according to Morningstar. But in common with global investors, bond funds still proved more popular, attracting €15.9bn, making it the strongest quarter for bond funds on record. Asset allocation funds had another good month, but money market funds suffered significant outflows as investors concluded they held little merit in a climate of increasing risk appetite.
Among equities, eurozone large caps were a surprising strong point, taking €506m in net inflows. Fund selectors have been holding extreme underweight positions and, with signs that the eurozone crisis might be easing, have been bringing their positions back to normal.
However, it was emerging market equities that saw the strongest inflows, suggesting a significant amount of pent-up demand. GEM funds posted €1.42bn over the month. Investors showed a marked preference for diversified global emerging markets funds, such as those from Aberdeen and First State, rather than single country or BRIC funds. In contrast, defensive markets such as Germany, the UK and US had a difficult month and were the main areas of redemption.
In the UK, the picture was a little different. IMA statistics showed equity funds beating fixed income funds for the first time in a year. Equities saw net retail sales of £541m, in contrast to its average of outflow of £65m during the past 12 months. The last time equities were the best-selling asset class was in August 2011.
As with elsewhere, eurozone equities were a strong performer as investors rushed to cover underweight positions, and defensive markets, such as the UK, remained relatively unpopular. The global sector saw the strongest inflows, with net retail sales of £414m. However, while this would seem to suggest a re-embracing of risk, the absolute return and two equity income sectors were also popular, suggesting investors are not quite ready to take a risk on growth.
The strong inflows into riskier assets were reflected in fund performance. Global emerging markets, Asia and China strategies were all up in October, with China particularly strong. The other top-performing sector – property – has proved stubbornly unpopular with investors in spite of a more consistent run of performance.
However, investors have not been rewarded for their increased allocation to global equities. This was among the worst performing sectors over the month, one of the few in negative territory. The North American and technology & telecoms sectors were also weak, partly as a result of Apple’s disappointing quarterly results, which saw its share price slide. Apple is the largest holding for many of these funds.
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