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Fixed Income Suffers as Investors Brace for Rising Rates, Morningstar’s Latest Fund Flows Data Reveals

Morningstar’s latest fund flows data indicates that fixed income suffered in August as investors brace for rising rates. As the U.S. Federal Reserve laid out a timetable for the tapering of bond buying, commonly known as QE3, investors embarked on a selling spree, redeeming long-term funds on a substantial scale. According to Morningstar data, long-term European funds posted net redemptions of EUR 2.1 billion in August. Bond funds suffered the most, with investors withdrawing EUR 7.9 billion; outflows from equity funds totalled some EUR 683 million.

Further findings from Morningstar’s latest fund flows report include:

  • Six of the 10 Morningstar long-term fund categories hit hardest by redemptions in August were global or Asian emerging-markets categories.
  • Funds offering European and eurozone large-cap equities gained traction: Europe large-cap blend equity enjoyed the highest inflows of any Morningstar category in August, collecting EUR 1.6 billion.
  • PIMCO Total Return Bond Fund saw outflows of EUR 1.1 billion. Year to date, the European version of the US diversified bond fund shows an organic growth rate of -19.74%, which implies that the fund has lost nearly a fifth of the assets held at the start of the year to redemptions.
  • The BlackRock ISF Developed World Index posted EUR 871 million in net new money, the highest inflows of any long-term fund in August.
  • With net inflows of EUR 17.4 billion, JPMorgan tops the list of asset-gatherers year to date, followed by BlackRock (EUR 16.1 billion) and Franklin Templeton (EUR 11.6 billion).

Ali Masawah, from Morningstar’s European Fund Flows team comments: “August’s open-end asset flows data makes apparent the impact of the tapering debate. European investors shunned emerging-markets equities and bonds and invested in allocation funds and alternative products. Notably, previously unloved fund categories European and Eurozone large-cap equities have profited from the stampede out of emerging-market assets. Looking ahead, it remains to be seen if the Federal Reserve’s September 18 refusal to slow down asset purchases will calm investors and reverse this trend.”