A turbulent first half of the year has had a clear impact on fund flows, with renewed investor interest in bond funds, increased focus on emerging markets, and continued growth of passive strategies defining the landscape for the first six months of 2023. BlackRock’s iShares and Vanguard led the pack in terms of inflows during the first half.
“Bonds are Back,” declared Pimco, the American bond specialist, in a research report in January of this year. The attractiveness of bonds improved significantly due to rising yields caused by aggressive interest rate hikes by central banks worldwide. Higher interest rates and the looming threat of a recession made bonds an appealing alternative to stocks, offering much higher initial yields, thus challenging the “There is no alternative” (TINA) scenario.
This perspective seems to have been embraced by investors, evident from the substantial inflows into bond funds during the first six months of 2023. Following a challenging 2022, during which €89 billion flowed out of both active and passive bond funds, fixed-income securities have once again become a focal point for investors. A net inflow of €102 billion underscores the pivot that investors have made towards this asset class.
Successful first half for European bonds
Driving the trend, the Morningstar category Fixed-Term Bonds played a major role, attracting over €30 billion in inflows, with many Spanish funds benefiting. European government bond funds and European credit funds also saw significant interest, with net inflows of €14 billion and €13 billion, respectively, representing an organic growth rate of approximately 20 percent. As a result, the first half of 2023 was the most successful for European government bonds in the last fifteen years.
On the other hand, equity funds experienced a net inflow of €17 billion over the first six months of the year, despite a turbulent period. In the first quarter, investors were willing to allocate more capital to riskier investments, resulting in a net inflow of €32 billion. However, this sentiment reversed in the second quarter, which closed with an outflow of nearly €15 billion.
Emerging markets recovery expected
Zooming in on the underlying Morningstar categories, it is evident that investors are anticipating a recovery in emerging markets. Despite lower valuations and higher growth prospects, the region has outperformed developed markets only four times in the last ten calendar years. In 2023, emerging markets continue to lag behind, with the MSCI World index returning 15.15 percent compared to a mere 7.85 percent for the MSCI EM index.
Nevertheless, disappointing results did not deter investors from pouring €17 billion into emerging market funds, matching the six-month record for the category set in 2010. Strategies from iShares, Amundi, and UBS were particularly popular. Investors showed interest not only in broad emerging market funds but also in specific country-focused funds. Notably, the highest organic growth was observed in the category of Brazil Equities (+45 percent), followed by Vietnam (+30 percent) and Emerging Europe (+24 percent). Additionally, India featured in the top 10 with an organic growth rate of over 7 percent.
Finally, it is worth mentioning the success of Japanese large-cap equity funds, which welcomed an inflow of nearly €3 billion in the second quarter thanks to the surge in the Nikkei index to its highest level in 33 years. As a result, the category ranked among the top three Morningstar categories with the highest inflows during that quarter.
Top 5 Asset Managers with highest inflows
Looking at the asset managers that have profited the most from the shift in investor sentiment, we present the top 5 based on net inflows during the first half of 2023, considering both active and passive European funds.
1. iShares: Leading the pack by a significant margin, iShares attracted a total of €33.8 billion into their ETFs. Of this amount, €14.5 billion flowed into equity trackers, and €18.6 billion into bond ETFs. Investors showed interest not only in iShares Core MSCI World ETF and iShares Core MSCI EM IMI ETF but also in fixed-income offerings. iShares Core € Corporate Bond ETF saw an inflow of €3.8 billion, representing an organic growth rate of 73 percent. The broader range of fixed income trackers also resonated with investors, spanning emerging market bonds to short-term bonds.
2. Vanguard: Following at a considerable distance, Vanguard recorded a net inflow of €14.5 billion. Passive funds were especially popular, with slightly higher interest in equity indices compared to fixed income products. Notably, the Vanguard U.S. Treasury 0-1 Year Bond ETF experienced strong inflows. Since its launch in 2020, the ETF had remained relatively obscure until investors flocked to it in the last four months, resulting in a net inflow of €1.3 billion, equivalent to an organic growth rate of an impressive 630 percent.
3. M&G: Taking the third spot, M&G has had a strong start to 2023 for its actively managed fund range, attracting €10.7 billion in new investor capital during the first half of the year. This positions the fund house to reverse a five-year consecutive outflow trend into a positive figure. Nearly half of this inflow is attributed to the M&G (Lux) Asian Local Currency Bond Fund, which saw €4.8 billion in inflows. M&G (Lux) Asian Corporate Bond Fund also performed well, garnering €1.9 billion in new investments. On the equity side, M&G Japan Fund benefited from the strong performance of Japanese equities, attracting nearly €1.2 billion in inflows.
First-half 2023 inflows
Jeffrey Schumacher serves as the Director of Manager Research at Morningstar. Morningstar conducts analysis and evaluation of investment funds based on quantitative and qualitative research. Morningstar is one of the knowledge partners of Investment Officer and ranks five investment funds or providers weekly.
*The image accompanying this article is an AI-generated photo.
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