Emerging Market Debt Funds Are Yet to Fully Recover From COVID-19

November 25, 2020 — London

Europe’s largest emerging market bond managers are struggling to recoup lost fund flows

Fund flows at the largest emerging market bond managers by assets under management (AUM) have struggled in 2020, with the coronavirus pandemic having taken a toll on higher-risk investments, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Overall, European AUM in emerging market bond funds—€275.8 billion (US$327.5 billion) as of September 2020—have so far failed to match the heights of 2019. AUM ended last year at €314.2 billion, meaning September’s position represents a steep 12.2% decline. This experience contrasts with those of the wider markets, which have generally seen a resurgence since March’s downturn.

“Emerging market bond flows have fluctuated in Europe over the past few years, registering net withdrawals of €19.4 billion in 2015—when currency volatility and the fact that some countries were struggling to service their debt meant investors were unwilling to be over-exposed—before recovering to deliver record inflows of €60.6 billion in 2017,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates.

But despite 2020 having been a largely bleak year for many of Europe’s prominent emerging market managers, some have seen their offerings prosper. Some managers are betting on a recovery—a spate of launches have occurred this year with a particular emphasis on sustainable investing.

Some emerging market bonds have greater appeal than others. For example, confidence in Asia’s ability to recover quickly from the pandemic saw Italian investors invest more than €205 million specifically in Chinese bond funds in September.

As the economic fallout from the coronavirus continues to squeeze interest rates in developed markets, investors will look further afield for yield. Bonds have slowly crept toward or into negative real-yield territory because of slow economic growth.

“For the time being, retail investors are mainly opting for low-yielding, liquid, highly rated sovereigns. With March’s market crash still in mind, it may be a while before cautious investors in Europe return to higher-risk, higher-return strategies,” notes Zumbo.

Other Findings:

  • September brought mixed fortunes for various markets in Europe. Despite frail market conditions, German investors have maintained faith in their portfolios, adding €2.1 billion (US$2.5 billion) to their holdings. After a year of up-and-down sales figures, the U.K. fund industry also had a positive month, registering €1.7 billion in net sales. The Italian market had a surprisingly tough month as local investors pulled €1.2 billion from funds in the country.
  • Passively managed funds in Europe registered another positive month, gathering €10.8 billion of net inflows during September, although the tally was 21.5% less than the previous month's. Overall, passively managed products have recorded net sales of €84.0 billion year to date, far outpacing their actively managed counterparts, which suffered outflows of €61.3 billion during the first 10 months of 2020. Exchange-traded funds (ETFs) in Europe attracted €4.9 billion in net sales in September. Equity ETFs were the month's bestsellers, whereas bond ETFs bled €631 million.

Note to editors

These findings and more are from The Cerulli Edge―European Monthly Product Trends, November 2020 Issue.

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