Last updated: 11:29 / Thursday, 29 August 2019
Report by Cerulli

Flexibles Must Act to Reverse Outflows

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 Flexibles Must Act to Reverse Outflows
  • Europe's hard-hit strategic bonds need to cut fees
  • Bond funds with a substantial high-yield element were hardest hit
  • While Goldman Sachs, PIMCO, and M&G charge between 1.4% and 1.7%, Artemis and BNY Mellon charge less than 1%

Asset management companies with flexible bond products that outperform have a chance of reversing the recent run of outflows but fee cuts may be a decisive factor in tempting back investors, according to the latest issue of The Cerulli Edge - European Monthly Product Trends Edition.

Flexible bond products, a category which usually includes strategic and unconstrained bond funds, fell out of favor in 2015 after soaring in popularity the previous two years, partly on the perception that they were better able than other bond funds to cope with the U.S. Federal Reserve's supposedly imminent rate rises, notes Cerulli Associates, a global analytics firm.

The entire bond market suffered last year, but funds with a substantial high-yield element were hardest hit. However, Cerulli believes that the policies of central banks can benefit flexible bonds. The European Central Bank has cut its main refinancing interest rate to zero and announced an extension of bond buying. With some yields already negative, value in European bonds is proving hard to come by. This strengthens the case for a fund to be as unconstrained as possible as it searches for alpha. If emerging market corporate bonds seem to offer better value than eurozone sovereigns, the fund can act accordingly.

"Flows for flexibles may take some time to come back and many will fall by the wayside," says Barbara Wall, Europe managing director at Cerulli Associates. "However, stronger funds may benefit from the shakeout. The longer established ones with better past performances may be able to convince investors they can recapture the glory days. Their chances of doing so will be that much greater if they reduce charges, even if only temporarily."

Wall points out that Goldman Sachs, PIMCO, and M&G, which charge in the 1.4% to 1.7% range, look expensive given recent negative returns, especially when compared with the likes of Artemis and BNY Mellon, which charge well under 1%. She adds that some funds should consider ditching their performance fee, even though this has been largely irrelevant given the losses.

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