Covid-19 Causes Record Weekly Outflows from European Bond Funds - European Funds Insight

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As the coronavirus continued to sweep across Europe, the fund management industry saw the highest weekly net sales outflow on record. Every asset class and fund type experienced negative net sales as investors fled financial markets. A total of €91 billion was redeemed from the European fund market during the week ended March 18, representing approximately 1% of total European assets.

Figure 1: Record Net Sales Outflows from European Funds (Weekly Data, In Billions of €)

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*Data as at March 18th 2020 sourced from ISS MI Simfund.

Can Central Banks Save The Bond Market Again?

Actively managed bond funds succumbed to investor redemptions with a record breaking €50 billion net sales outflow week ended March 18. Over the last decade, bond funds saw huge inflows as investors sought better returns than that offered by European cash deposits. This influx of investor money, as well as actions taken by banks to reduce their balance sheets, meant that asset managers have become an increasingly important bond market participant. In the UK, for example, some 60% -70% of new corporate bond issues are bought by bond funds[1].

With continuing outflows from all types of bond funds – active, passive and ETF - bond market liquidity has been reduced; however, European asset managers are not regulated as ‘systemically important’ and are, therefore, not eligible for government bailouts as banks were in 2008. On March 23, the Federal Reserve announced their ‘big bazooka’ and committed to provide unlimited liquidity into bond markets with scope to buy Treasuries, MBS and investment grade credit. This follows other central banks – the ECB, Bank of England and Bank of Japan - that had already announced credit market support. Although this may support liquidity in bond markets, investors may still be concerned about potential capital loss from rising yields.

Equity funds saw a net sales outflow of €23 billion in the seven days to March 18, mixed asset funds experienced redemptions of €13 billion, and €6 billion was redeemed from other funds including real estate and alternatives. Further details can be seen in the sector breakdown tables below.

Every asset class within passive funds and ETFs also saw outflows, but fixed income was hit hardest with a net €3 billion redeemed from passives and €7 billion from bond ETFs. Equity passives and ETFs saw outflows of €880 million and €3 billion, respectively.

Negative performance was the biggest drag on assets under management. Real estate funds were the worst performing asset class (-22% for the week) as valuation firms were unable to produce reliable property valuations. Equity funds were second worst performing with -13% for the week ended March 18, bond funds -6% and mixed asset funds -8%.

Sector Breakdown

The following tables show net flows in millions of euros by sector for active funds. UK equity and target maturity were the only sectors to see inflows in the seven days to March 18 2020.

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*Tables do not add up to 100% due to some sectors being removed.

*Data as at March 18th 2020 sourced from ISS MI Simfund.

The Funds Industry Will Survive This

Outflows are to be expected during an economic downturn, but the fact remains that the majority of fund investor wealth is held by people drawing pensions or in the later stages of the investment cycle. The necessity for investors to own income-generating assets will return and fund flows will likely turn positive when the global pandemic and economic downturn improves.

If you have any further questions about this data or any other aspect of the European funds market please contact us.