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In Europe, both bond and equity funds suffer mass withdrawals amid COVID-19 crisis
June 2020, London—The market mayhem in March triggered by the coronavirus pandemic made a mockery of traditional safe havens, according to the latest The Cerulli Edge―Global Edition. COVID-19 caused an unprecedented exodus from both European bond and equity funds, which traditionally move in opposite directions.
Outflows hit all asset classes, although alternatives, safeguarded by the different redemption terms and valuation cycles of closed-end fund structures and private markets, were not dumped to the same degree as their liquid siblings, notes Cerulli Associates.
“A long-held belief that bonds hold their value in times of volatility has made them a traditional haven. Not so in March, when an estimated €175 billion (US$189 billion) was withdrawn from fixed-income funds, almost eight times more than the €22 billion of outflows the month before,” says Justina Deveikyte, associate director, European institutional research at Cerulli.
Sharp falls and ensuing outflows hit every bond category, but high-yield investors in euro-denominated mutual funds in riskier areas, such as emerging markets and corporate debt, were hardest hit.
European mutual equity funds also experienced historic outflows, with an estimated €71 billion leaving the asset class in March.
In some cases, extreme volatility and outflows saw asset managers gating bond funds in the face of wide spreads between the funds’ net asset value and intra-day prices. Nordic bond funds were hardest hit.
The suspensions have caught the attention of regulators, says Deveikyte. French and German watchdogs have started demanding daily updates of investor withdrawals from open-end funds. The authorities in Luxembourg and Ireland are monitoring the sector, the former by sending weekly questionnaires to asset managers. In Sweden, alarm is growing that high-yield corporate bond investors were not aware of the risks they faced, triggering some calls on funds to adjust their marketing practices. In Germany, where the only tool on offer for funds facing a liquidity squeeze is fund suspension, regulator BaFin is exploring solutions via swing pricing and redemption gates.
Investors are starting to tentatively return, but the suspensions could see some investors lose their appetite for liquid funds that gate redemptions. Alternatively, it could signify a broad acceptance that daily liquidity is no longer a given. In an example of money going back into more risky assets and out of products linked to cash, flows into U.K. money market funds, which soared in March, slowed.
NOTES TO EDITORS:
These findings and more are from The Cerulli Edge―Global Edition, June 2020 issue.
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