Bond Funds Are Set to Rebound in 2019

Passives are likely to see the fastest growth


February 2019, London. Bond fund providers have good reason to be positive, with the re-emergence of volatility likely to generate some exciting returns in 2019, especially in high yield. So says the latest issue of The Cerulli Edge―European Monthly Product Trends.

Bonds suffered late last year, partly due to the anticipation of the effects of the end of quantitative easing programs in various parts of the world, says Cerulli Associates, a global research and consulting firm. Most bond funds experienced negative performance and outflows followed, with high-yield bond funds hardest hit on both counts.

“However, in the first few weeks of 2019 there was a resurgence in certain quarters of the bond market as investors sought safety,” says André Schnurrenberger, managing director, Europe at Cerulli. “And there is no place safer than German government bonds. Yields on 10-year German government bonds touched 0.08% in early February. There could yet be a return to the situation of 2016, when investors were paying to hold German debt.”

Volatility, he says, means that better opportunities in credit may lie ahead. “We don’t believe that investors coming in now have missed the rally.”

Investors looking higher up the risk curve while staying within fixed income will see more scope for gains in high-yield bonds and emerging markets (EM), says Schnurrenberger. “Such investors are increasingly favoring the passive route, although the surge in such products is from a low base. Exchange-traded funds are growing fastest.”

Cerulli maintains that the marketplace is not as crowded as it might appear, leaving providers with room for further growth and competing products.

Active funds will continue seeking to leverage their expertise in EM debt to help them outperform benchmarks.

Other Findings:

  • The French fund market remained relatively stagnant during 2018, attracting net new flows of just €584 million (US$660 million). Property funds performed the best, with net inflows of €2.1 billion. Although French distributors are generally open to working with new asset managers, Cerulli research suggests that some want to work with fewer managers. “It is becoming increasingly important for asset managers to provide value to distributors by collaborating on events, producing content for distributors, or offering tailored solutions,” says Schnurrenberger.
  • In Germany, mixed-asset funds fared best in terms of flows in 2018, attracting €7.6 billion, followed by property funds with €4.3 billion. Germany's equity funds did better than those in other European markets, accounting for €3.9 billion in net inflows during the year, largely driven by active global equity funds. Cerulli notes that demand for smart beta is on the rise among German institutional investors seeking to cut costs. In addition, the country’s private banks are increasingly considering environmental, social, and governance integration in alternative strategies.

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