By Steve Johnson
Published: May 23 2010 13:31 | Last updated: May 23 2010 13:31
Europe’s fund management industry enjoyed a fourth straight quarter of robust growth in the first three months of 2010, continuing its recovery from the global financial crisis.

However, the continent’s investors exhibited a remarkable lack of faith in the economic prospects for Europe itself, choosing to pile into emerging market or global funds rather than those investing in domestic markets.

Sales see BlackRock take top spot – May-11

European recovery continues in Q4 – Feb-21

Net inflows for first time in 2 years – Nov-22

Fund closures eclipse launches – Sep-20

Plunging assets cast gloom over UK pensions – Jun-07

Asia fund flows begin to waver – May-17

This trend is likely to become more engrained still, with the spillover from the southern European government debt crisis having intensified since the end of the first quarter.

“If you look at bond fund flows, investors have already begun pricing in their uncertainty. It’s emerging markets bonds and global bonds that are taking the money,” says Bella Caridade-Ferreira, head of market research at Lipper FMI, which compiled the data. “They are hedging their bets and saying emerging markets or a global product is a better option.”

The divide was starker still on the equities side. Euroland equity funds suffered net outflows of €1bn (£853m, $1.2bn) and slightly wider ranging Europe equity funds were flat, even as equity funds as a whole attracted a net €26.4bn of fresh investment.

The rumblings of the impending crisis in the olive belt also permeated domestic investment markets.

For the second quarter running Greece bucked the positive trend, with a net €283m being withdrawn from its domestic fund market.

Greece was also the only one of the 33 markets covered by Lipper that saw the market value of pre-existing assets fall, as the Athens General stock market index fell 5.9 per cent in the first quarter and 10-year government bond prices slid 11.1 per cent, losses that have accelerated since. As a result the size of the Greek fund market fell 3.5 per cent, or €418m, to €7.7bn.

After posting a rare positive quarter at the end of 2009, Spain also swung back into deficit, with a further €3.3bn being withdrawn from its domestic fund market. Ms Caridade-Ferreira says Spanish retail investors “are just not in the market”, with money continuing to be switched from bond funds to deposit accounts.

Nevertheless, wealthier Spaniards are putting more money to work says Ms Caridade-Ferreira, although these flows are increasingly going into “international” funds (which Lipper defines as those that do not derive four-fifths of their sales from a single country) managed by foreign groups, rather than domestic Spanish offerings.

The overall picture remains far healthier. Stripping out low-margin money market funds, net inflows hit €98.2bn in the first three months of 2010, up from €85.2bn in the prior quarter, taking inflows over the past 12 months to €348bn.

Factoring in rising markets, assets under management across Europe rose €275bn to €3,970bn, the highest level since May 2008, but still below the peak of €4,750bn recorded in May 2007.

Ms Caridade-Ferreira argues the industry is benefiting from exceptionally low short-term interest rates, with €38bn of the net inflows consisting of money transferred from very low-yielding money market funds.

“What’s really helping the fund industry is the low interest rate environment. We have seen a huge exodus from money market products and that money is going into other asset classes.”

Interestingly, although equity funds outstripped bond funds in the popularity stakes in 2009, attracting €112bn of net inflows compared with €85bn for bond vehicles, fixed income appears to be pulling ahead in 2010. In the dominant “international” segment, net inflows into bond funds totalled €35.7bn in Q1, against €19.4bn for equities.

Ms Caridade-Ferreira attributed this to heightened volatility in the equity markets in the first quarter, along with a degree of profit taking as some investors crystallised gains in March.

The four top-selling equity sub-sectors in Q1 were emerging market, global, Japanese and North American, a picture largely replicated in the fixed income world, where the emerging market and global sectors both saw net inflows above €6bn and US high yield was next most popular.

Mixed asset funds were also popular, particularly in Germany where they attracted net inflows of €4.7bn, with Ms Caridade-Ferreira suggesting this was driven by the introduction of a more onerous capital gains tax regime.

Absolute return funds also proved popular in the UK and Italy. This helped Franklin Templeton, whose best-selling funds were its global total return bond and traditional global bond products, rise to first place in the “international” category, with net inflows of €7.3bn.

Carmignac took second spot, but there were some lesser known names on the leaderboard. Universal Invest, with just €8.5bn of assets, took more than €1bn in Germany, while International Financial Data Services, a platform for funds operated by independent financial advisers, was ninth best seller in the UK.

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