Equity funds: are investors in or out?

European fund flow data shows a persistent flight from equities, but some of Europe’s largest fund providers say investors are returning to riskier assets.

The latest fund flow data from Morningstar shows investors have taken more than €7bn out of equities in August, especially from US focused funds.

Instead, the money has flown into bond funds, which have gathered nearly €17bn that month in Europe.

Ali Masarwah from Morningstar’s European research team says: “Yield-hungry investors are continuing to pin their hopes on corporate bonds, especially high-yield and emerging markets debt.”

Yet Achim Küssner, CEO for Germany at Schroders Investment Management, sees a very different dynamic. He says investors are beginning to return to risky assets.

Küssner says eight out of the top 10 bestselling Schroders funds this year have been equity funds.

Equity markets, too, have performed extremely well over the past 12 months. MSCI World has gained over 22% in this period, and MSCI Europe made nearly 27%.

In comparison bond yields, even in emerging markets, cannot compare to these indicators.

China’s 10 year government bonds, for example, are yielding around 3.5%. Russia’s five year government bonds, which have recently been made available to foreign investors through Euroclear, are bringing around 7%.

The risk profile of bond funds is also not the same as it used to be. Europe’s core countries, traditionally a safe haven for investors, are plagues by the debt crisis, while emerging economies remain a relatively risky alternative.

Masarwah says “safe-haven vehicles investing in US dollar, Euro and Sterling government bonds remained on European investors’ sell list in August.”

Morningstar’s bond strategist Dave Sekera advises investors to “be cautious in selecting which bond offerings they participate in, lest they be plagued with buyer’s remorse if the market takes a turn for the worse.”

He explains the ECB’s readiness to purchase troubled European sovereign debt “will probably force corporate credit spreads tighter as this new liquidity looks for a home.”

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