Back in November 2016, only a third of Italy’s fund buyers were planning to increase exposure to absolute return funds, down from more than 60% at the start of last year. The motivation seemed clear: not only had Italy’s fund buyers been increasing their allocation to absolute return funds for years now, returns hadn’t been forthcoming.
This year however, appetite for absolute return has increased strongly once more. Italian fund selectors have long been urging their clients to swap some of their bond holdings for absolute return funds, and recent market developments seem to have reinforced that view.
Rate rise hedge
Since autumn, government bond yields have risen as central banks are nearing the point they will start withdrawing stimulus measures. At the same time, absolute return funds finally started delivering some modest positive performance, though most still show negative performance after fees over a two-year period.
But these market movements have helped to reinforce fund selectors’ views that absolute return funds can protect investors against rising yields.
“I think absolute return bond funds should deliver good performance in a rising rates environment,” Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan, told Expert Investor.
It seems inevitable rates will eventually rise, which would affect both equity and bond markets, but the question is when Europe’s central banks will give it a start. The hawkish statements this week by Europe’s two most influential central bankers, the ECB’s Mario Draghi and the BoE’s Mark Carney, could mean that’s sooner than many have anticipated so far. At least, that’s how markets interpreted it, by sending bond yields up and share prices down.
If Mario Draghi and his ECB-board indeed make the hawkish turn the Italian seemed to be trying to communicate to the market last week, it’s likely that their countrymen’s fondness of absolute return funds will finally be vindicated.
Work to do
But they have still got some work to do: while Italy’s fund buyers have consistently been telling us they intend to reduce their allocations to fixed income, they haven’t yet managed to really convince their clients to do so. According to figures provided by Assogestioni, the Italian asset management association, Italian investors have invested more than net €18bn in fixed income funds in the first five months of the year.
Bond funds now account for 41.5% of total assets, almost twice the share of equity funds (22.3%). ‘Balanced’ and ‘flexible’ funds account for 23.4% and 8.9% respectively.