The erratic first half of 2022, which sent leading stock market indices into bear market territory, has clearly left its mark on the fund universe. Fund houses active in the bond markets saw a general outflow of investor money, and although on balance equity funds attracted investor interest, large differences could be seen at the category level. Active funds did not appeal to investors, while the least sustainable investment funds were also out of favour.
With outflows of almost EUR 85 billion in the first six months of 2022, bond funds were among the big losers. Rising inflation and interest rate hikes by central banks worldwide have turned investors away from fixed income.
Outflows from bond strategies of more than EUR 49 billion in the second quarter of 2022 are among the top three largest outflows for the asset class since Morningstar began measuring fund flows in 2007. Only the EUR 70.4 billion outflow in the final quarter of 2008 amid the financial crisis and the EUR 84.5 billion outflow in the first quarter of 2020 at the start of the Covid
Largest outflows among risk categories
Zooming in on the various bond categories, it becomes clear that investors’ risk aversion increased sharply. The largest outflows were realised by bond funds focused on corporate bonds, high yield bonds and emerging market bonds. Chinese bond funds in particular were sold, with the category shrinking by around 20 per cent over the first six months. For European corporate bonds, the first half of the year was also one to be quickly forgotten. The outflow of EUR 11.7 billion not only placed the category in the top three bond categories with the largest outflows, but it also represented a record outflow over the past 15 years. Schroder ISF EURO Corporate Bond saw €1.4 billion of outflows, followed by the iShares Core € Corp Bond ETF and KBC Bonds Corporates Euro, which both lost around €900 million.
While equity funds attracted investor interest, this was certainly not the case for investment funds specialised in growth stocks. The wave of sales that hit fast-growing, highly-rated and loss-making growth stocks resulted in an outflow of nearly 15 billion euros for the global large-cap growth stock category. As a result, fund houses with a relatively large range of funds focused on growth stocks are having a tough year to date, including Baillie Gifford, Morgan Stanley and Fundsmith. Furthermore, we see many European equity funds falling into the more unpopular categories, which can be explained by the impact that the armed conflict between Russia and Ukraine is having on the European economy.
Sustainability factor limits the damage
Looking at fund flows by Morningstar Sustainability Rating from a sustainability perspective, it appears that on balance there have been outflows for each rating. However, the EUR 1.6 billion outflow for funds with five globes was significantly less than for funds with fewer globes. Funds with three globes saw a total outflow of EUR 27 billion, while funds with two globes saw a total outflow of over EUR 33 billion.
The same picture emerges when we filter the fund universe by SFDR classification, with the most sustainable funds with an Article 9 rating seeing inflows of EUR 17.7bn. Funds with an Article 8 label saw almost EUR 38 billion of outflows, and Article 6 funds lost EUR 30 billion of investor money.
Taking stock of the first half of the year, and changing the lens through which we analyse fund flows to that of fund level, bond specialist PIMCO faced a strong headwind. With PIMCO GIS Income Fund and PIMCO GIS Global Investment Grade Credit Fund, the fund house has two funds in the top five funds with the largest outflows. The EUR 8.8bn outflow from these two funds is a major reason behind the EUR 19.2bn outflow from the fund house in the first half of the year, a negative record for the asset manager.
Top 5 outflows first half year 2022 at fund level
