Cherry Reynard takes a look at which sectors investors favoured last month and highlights the trends signalling a return to risk.
In the euphoria of the early 2013 rally, it is easy to forget the grim shadow cast by the US fiscal cliff at the end of 2012.
However, equities were gathering momentum in December in spite of the continued uncertainty on US tax rises and spending cuts. Fixed income, in contrast, was beginning to look pricey, even for the most safety conscious investors, and many were starting to reconsider their views on the asset class, a trend that has accelerated at the start of 2013.
Investors’ year-long preference for fixed interest was certainly over by the end of 2012. According to figures from EPFR Global, bond funds saw outflows of $4.1bn in the third week of December - their worst performance in 18 months.
Where did the smart money go in December?
Money market funds proved even less popular, with $18.8bn leaving the sector. Equities picked up some of these outflows, with $5.5bn moving to the asset class the same week.
Equally, there was a clear change in the type of equity fund sought by investors. In previous months, investors had dipped a toe back into equity markets via equity income and blue chip strategies, but in December these areas lost momentum and were superseded by US and European-focused funds, suggesting investors were willing to take more risk. Emerging market equities continued their popularity, seeing inflows for the 15th consecutive week.
However, this was not a universal dash for higher risk equity funds. Funds focused on French equity continued to see outflows as investors fretted about the precarious state of the country’s economy.
In Europe, caution still won out for many wavering investors. Fixed income is still substantially ahead for the year to date, having drawn inflows of €157,561m since the start of 2012. Equities, in contrast, have seen outflows of €11,054m over the same period. This has been starting to reverse in recent months and the trend accelerated towards the end of 2012.
Equity funds saw inflows of €4,744m during November, still behind the flows into fixed income funds, but their strongest month since April 2011. As with elsewhere, it paid to be selective. The weakest areas were the large-cap defensive markets that had proved popular when investors were feeling more tentative, Germany and the UK in particular. The UK large-cap value strategy saw outflows of €388m during the month. This exposes the assumption by many investors that the defensive markets would be the key beneficiaries of any move out of bonds and into equities.
Instead, the most popular areas were global emerging markets, Asia-Pacific ex Japan and global large-cap value. Global emerging markets funds saw inflows of €15,705m in 2012, putting them substantially ahead of their equity peer group. This has come in spite of the relative underperformance of emerging market equities this year relative to some other areas, such as the eurozone markets. Any forays back into eurozone equities on the part of investors have been tentative at best.
Allocation funds was the other key area of strength all year and last month continued to see strong flows. This type of strategy saw inflows of €3,097m during the month, bringing total flows for the year to €25,076m.
In the UK, Cofunds data showed the Mixed Asset 20-60% Shares sector continued to attract most investor interest. Fixed income sectors drew some investors, but only at the higher-yielding end. As elsewhere, UK Equity Income and UK All Companies fared badly as investors orientated themselves towards higher growth areas. Global Equity Income was a key beneficiary of the move away from the traditional UK equity sectors.
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Has run Cautious Managed fund since 2011
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Invested from 2006-2011