Intermediary distributors of investment funds expect record-low returns in European government bonds to continue to fuel a dramatic shift of client assets into a wide range of products including equities, emerging market and corporate bonds, multi-asset products and alternative investments, according to a new study from Greenwich Associates.
Against the backdrop of the European Central Bank kicking off its long-awaited government bond buying program, a full 62% of the fund distributors participating in the Greenwich Associates 2014 European Intermediary Distributors Study say they expect their clients to “significantly decrease” allocations to Domestic/European government bonds over the next three years. Although flows in to fixed-income funds overall are expected to remain positive, the study indicates that this growth will not be supported by net positive flows into traditional government bond funds.
Only 8% of the 162 funds of funds, private banks, retail banks, financial advisors and insurance companies participating project significant increases to these allocations. Distributors also expect to see sharp reductions in allocations to global government bonds, with 47% predicting significant decreases and 22% projecting significant increases.
“With bonds looking expensive and providing little income potential, investors are looking for more attractive opportunities ranging from income-generating equity funds to replace their low-risk allocations with absolute return and multi-asset products that can maximize the potential for risk-adjusted returns,” says Greenwich Associates consultant Lydia Vitalis.
Flow to Shift to Equities
Many of the assets shifting out of government bonds are expected to flow into equities—with emerging markets and Asian equities projected to be the biggest recipients. Three quarters of the distributors expect to see significant increases in allocations to emerging markets equities, and 56% expect big increases in Asia Pacific equities.
In each asset class, only 3% anticipate significant declines. Distributors also expect sizable increases in allocations to European and global equities. Distributors see investors as mixed in outlook for U.S. equities, with 30% projecting significant allocation increases and 27% looking for significant reductions.
Distributors Add New Products to Meet Investor Demand
European fund distributors expect to meet investors’ growing demand for replacements to government bond holdings by adding new product offerings. Topping the list of new products being added to distributor platforms are emerging market equity and absolute-return products.
Most European fund distributors added equity products to their offering in the last year, especially in European, emerging market, U.S., and global equity products. “We expect this trend to continue, led by emerging market and European equity products,” says Vitalis. “Distributors have added products in all alternatives categories, but continue to look for significant opportunities to add more, especially in hedge funds, structured bond products and private equity.”