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European flexible bonds have nowhere to flow

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March 31, 2014 12:01 IST | India Infoline News Service
With the Fed tapering its monthly bond purchases and investors gearing up for interest rate hikes, money flooded into flexible and unconstrained bond funds. Many decided to flee traditional bond funds in favor of those less exposed
to interest rate risk, according to the March edition of The Cerulli Edge-European Monthly Product Trends.

In 2013, €23.5 billion (US$32.6 billion) flowed into flexible European bond funds, more than 30% of their total assets under management at the end of 2012. That compares with €73 billion for conventional bond funds, a flow rate of just 4.1%.

"Investors shifted into these so-called 'go anywhere' bond funds, which are able to invest in a wide variety of fixed-income products, including junk bonds. They also have more tools to navigate the current bond environment, including bets that pay off when interest rates rise," notes Barbara Wall, Cerulli's Europe research director.

"High yield was the place to be in 2013. When government bonds were losing money, high-yield bonds gained, like equities, in response to the improving corporate outlook."

But heavy outflows at PIMCO's flagship flexible bond fund and high cash holdings in other funds suggest the best opportunities have passed, and asset managers are waiting for a market correction.

Angelos Gousios, a senior analyst at Cerulli Associates, points to seven straight months of outflows at PIMCO's Unconstrained Fund and a massive 56% cash holding in the Income Opportunity Fund, J.P. Morgan Asset Management's biggest flexible bond fund. "We are moving into a higher alpha environment where stock-picking is key, and funds steer away from beta risk. But that is easier said than done, with the S&P 500 hitting new highs, and corporate valuations now looking stretched."

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