European investors investors chipped in a net €1.3bn into emerging market debt funds in June. This means it was one of only two asset classes to see net inflows over the month. The other one was investment-grade corporate bonds, welcoming €1.7bn in net new money, about €1bn down from May.
These figures suggest a strengthening tendency of a ‘reverse Great Rotation’: money flowing from equities to bonds, and cash. As Expert Investor reported earlier this week, equities saw total net outflows of €11.1bn in June.
The current asset allocation of NNEK, a Dutch wealth manager, indeed fits with this trend. “We have been increasing our credit risk somewhat and have an allocation of 8% to emerging market debt now within our fixed income portfolio,” says Jan Willem Tjoonk, NNEK’s head of investments. “And we are looking at adding EM short-duration bonds to our portfolios.”
Ditching government bonds
While corporate bonds have been reasonably popular with investors this year, this cannot be said of government bonds. Though the asset class retains some fans for now, government bonds have seen net outflows for the past four months. The last time something similar happened was in 2011/12, when the asset class had to cope with six months of consecutive net outflows.
However, at that point in time government bond yields were considerably higher than they are now, and a spike in (peripheral) bond yields as a result of the Eurozone sovereign debt crisis was the trigger of these outflows. When yields starting going down again, money found its way back into the asset class. This time around however, investors are abandoning government bonds because yields are at record lows.
“This is why we don’t anymore accept new clients in our defensive profiles, which allocate more than 70% to bonds,” says Tjoonk.
As investors are resorting to radical measures like this, the consequence is that government bond flows decline. However, Tjoonk is wary to shift too much of his allocation to higher-yielding bonds. “We are anxious to avoid an increase in correlation between our bond and equity portfolios,” he says. As a result, the Dutchman is quite heavy on cash at the moment. In three of the past six months, total fund flows have been negative. This suggests Tjoonk is far from the only investor preferring this option at the moment.