Morningstar Magazine - June/July 2018 - 41

important parts of alpha generation here. We
believe the managers have the ability and relevant
experience to combine macroeconomic analysis
with an understanding of the dynamics of
the gilt market and are able to effectively apply
this through a risk-aware portfolio-construction
process. We, therefore, retain the fund's
Bronze rating despite its disappointing abovemedian fees.
Ashis Dash is associate director, fixed-income strategies,
with Morningstar Manager Research, EMEA.

Europe Asset Flows:
A Roller-Coaster Quarter
GREATER EUROPE

France
The first quarter in Europe displayed two sharply
contrasting trends. Exuberant investors
showered fund providers with money on an unprecedented scale in January, driving assets under
management to new record levels. But after
market volatility staged a comeback at the outset
of February, investors' risk appetite tempered,
and the demand for European-domiciled long-term
funds (funds other than money markets) slowed
down. Net inflows receded to EUR 18.7 billion
in March, down from EUR 27.1 billion in February.
This was mainly due to reduced demand for
equity and allocation funds.
Net sales remained negative for bond funds for the
second month running, but outflows slowed
down considerably to EUR 410 million in March.
A closer look at the bond markets reveals
that investors' behavior did not follow the classic
risk-on, risk-off mode that is often associated
with volatile markets. Investors did exit
high-yield bond funds on a significant scale-
in the first quarter, U.S.-dollar high-yield
funds hemorrhaged 9% of their assets-and
flocked instead to government-bond products.
However, global emerging-markets bond
funds geared toward local currencies continued
to see high demand, with inflows amounting
to 7% of assets for the quarter.

gathered more than EUR 1.5 billion during the
month. It is noteworthy, however, that 90% of the
flows were collected by the U.S.-dollardenominated share class, which is distributed
exclusively offshore.

Index products continued to grow faster than
actively managed funds in March. However,
demand for index funds was lower than a year
ago: Net inflows to open-end index funds
and exchange-traded funds stood at EUR 3.6 billion
in March, the lowest level seen in a one-month
period since September 2016.

Investors remained positive on the Global
Emerging Markets Equity category. Inflows were
particularly high for GAM Emerging Equity, which
took in EUR 902 million in March. Overall,
investors preferred passive emerging-markets
equity vehicles, a contrast to the trend earlier in
the year. For the second month in a row, EUR
Flexible Allocation funds, which invest globally,
were among the top five categories by net inflows.

While passive bond funds continued to buck the
negative overall trend for bond funds, net inflows
to passively managed fixed-income open-end
funds and ETFs stood at about EUR 400 million in
March, down from EUR 1.7 billion in February.
Equity index funds saw net inflows of EUR 2.9
billion in March, down from EUR 9.4 billion.
Demand for actively managed long-term funds
stood at EUR 15.2 billion, the lowest level
seen since December 2016. Allocation funds were
the main growth drivers, pulling in net EUR 10.5
billion, followed by alternative funds and equity
funds. Inflows to equity funds fell to EUR 1.5
billion, down from EUR 4.5 billion in February and
EUR 27 billion in January.

Investors are also arguably optimistic about the
prospects for U.S. economic growth and
fiscal reform, given inflows into U.S. large-cap
blend funds. They clearly prefer passive options in
this market, as demonstrated by the immense
demand for ETFs, with Lyxor S&P 500 and
UBS ETF MSCI USA Select Factor Mix (a strategicbeta fund offering exposure to six factors)
gathering EUR 455 million and EUR 369 million,
respectively. Meanwhile, flows to actively
managed funds in the category were essentially
flat. This shift from active to passive funds has
been in play since the beginning of 2015.

Net sales of bond funds remained in negative
terrain, shedding about EUR 820 million, but the
assets drained at a much slower pace than
in February, when actively managed fixed-income
products lost EUR 7 billion to net outflows.

Turning to the laggards, widening spreads sparked
net redemptions from high-yield and corporatebond funds, with both euro- and U.S.-dollardenominated funds taking a hit. The outflows from

EUR Diversified Bond-Short Term enjoyed the
highest inflows. Demand was exceptionally strong
for Amundi S.F. Diversified Short-Term Bond, which

Europe Flows by Fund Category
Active

March Leaders

Passive

Estimated Net
Flows 1 Month
(EUR Mil)

Total Assets
(EUR Bil)

Estimated Net
Flows 1 Month
(EUR Mil)

Total Assets
(EUR Bil)

EUR Diversified Bond-Short

3,330

115

0.2

Global Emerg Mrkts Equity

1,073

212

1,478

74.0

EUR Flex. Allocation-Global

2,266

142

-6

0.1

-2,145

5.0

-1,377

133

-599

62.0

-818

-745

14.0

March Laggards USD High Yield Bond

Europe Large-Cap Blend
USD Corporate Bond
Includes open-end and exchange-traded funds.
Source: Morningstar. Data as of 03/31/2018.

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