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market insight munich 2013 q4

However, there was a mood of caution among our interviewees, in part reflecting short-term uncertainties surrounding the likely shape of the German government following the national elections, due to take place later that month.

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The family office, wealth manager, insurance company and private bank fund selectors our researcher consulted were similarly preoccupied by the apparent inevitability of a US/French-led military intervention in Syria, and the likely impact of such action on foreign exchange rates and the price of oil.

Absolute return

Strong demand for uncorrelated funds

Such worries may explain the unusually high level of appetite for absolute return strategies, which seek to produce returns uncorrelated with traditional investment benchmarks. More than half of our interviewees planned to increase their exposure to such funds over the following 12 months.

While Expert Investor Europe has found similar levels of demand in markets such as Sweden and Italy this year, this was comfortably the highest reading yet recorded among German fund selectors.

At the October 2012 Expert Investor Deutschland conference in Munich, for example, just 26% of investors expected to boost their absolute return allocations, on a net basis (see chart 1).

Mixed-asset

Experience and flexibility are valued

Investors were this year similarly hungry for mixed-asset strategies – a well-established sector with €130bn in AUM, according to BVI, the German fund association.

Mischfonds outsold their traditional equity and bond peers in the first quarter of 2013 (see chart 2), and fund selectors said they planned higher weightings in the year ahead.

Interviewees sought experienced mixed-asset portfolio managers with flexible mandates and long-term investment horizons.

Developed world equities

Europe preferred over US and Japan

Appetite for developed world stocks has fallen since last year’s Expert Investor Deutschland, but remains in positive territory overall.

Fund selectors’ preference for Europe over the US has strengthened (see charts 3 and 4) and interviewees viewed European companies as attractively valued, compared with their US peers. In addition, investors were wary about the future trajectory of the dollar, following its 10% decline against the euro since mid-2012.

There was also interest in Japanese stocks, with a net 23% of our interviewees expecting to bolster their exposure to the world’s third-largest economy in dollar terms.

Emerging market stocks

German appetite remains robust

Demand among Munich-based investors for emerging market equities has increased, and more than a third of our September interviewees planned to boost their exposure here – a sign that the city’s fund selectors viewed the region as good value following this year’s selloff in EM assets (see chart 5).

Just over a quarter of investors surveyed expected to increase their Asia ex-Japan allocations, and many were upbeat on the prospects for the region’s stock markets.

Western fixed income

Corporate bond funds will see inflows

While fixed income funds achieved the biggest overall inflows from German investors in the first half of 2013, our research shows some sub-sectors are more likely than others to gather assets over the next 12 months.

Western corporate debt funds seem set to claim the largest share of new money, with a net 29% of our interviewees expecting to boost their investment grade exposure – marking a strong upturn in appetite since last year’s Expert Investor Deutschland (see chart 6).

A similar proportion planned higher weightings to high yield (see chart 7).

Fund selectors noted the continuing popularity of the sector among income-hungry investors, and warned that default risk in this part of the bond market had increased. Nevertheless, interviewees viewed such securities as attractive, given the additional yield they offer over investment grade corporate debt.

German fund selectors were largely unenthused by low-yielding developed market sovereign bonds, although a net 6% expected to increase their weightings.

Developing world bonds

Appetite for EM credit has crashed

Demand for emerging market government debt is likely to be similarly muted in the months ahead.

Interviewees noted local currency sovereign bonds still offer attractive returns, and that long-term institutional investors such as insurance companies and pension schemes can use the asset class to benefit from the improving creditworthiness of the developing world.

Yet just 6% of interviewees in aggregate expected to increase their emerging market sovereign allocations (see chart 8).

The emerging market sell-off appears to have had a dramatic impact on appetite for riskier fixed income. In 2012, half of the investors at Expert Investor Deutschland planned higher weightings to developing world credit. In contrast, demand is likely to be flat over the next 12 months, with buyers and sellers cancelling each other out (see chart 9).

Matt Darczynski and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data.

For more information, contact Matt at matt.darczynski@lastwordmedia.com or on +44 (0)20 7065 7576.

Click here to see upcoming Expert Investor Europe events in Germany.

tom@ybc.tv

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