Not only are net fund flows to the asset class at all-time highs, absolute return is one of the favourites of European fund selectors, with 43% of them planning to increase exposure and just 9% decreasing allocation. Alternative UCITS equity funds are more popular than their bond equivalents, but both are widely in use.
Readying for market events
Data from the EIE Historic Fund Flows Database suggest that especially long-short debt funds, European equity long/short funds and event-driven absolute return strategies are wanted at the moment. Especially the latter category is a new kid on the block. In the first five months of 2014 inflows into absolute return funds performing event-driven strategies amounted to almost €1bn combined, whereas this particular product was virtually non-existent in terms of net inflows before.
“Sooner or later we will see a correction on the market. It doesn’t matter too much whether this will happen in one or in three years from now if one considers the remaining upward potential of the market, especially regarding bonds,” says Tim Peeters, senior wealth manager at Portolani. “The opportunity costs of not being in the fixed income market are quite low with YTM on euro and government bond indices below 1.5%. The question is just how central banks will be able to handle market turmoil.”
Peeters sees the European government bond market as one of the areas most at risk in case of commotion. “I only invest in short-duration bonds, and on the government bond market you should bring your duration back to zero, by going short on bonds of some countries.”
To prepare or not to prepare?
Tristan Delaunay, ceo of Paris-based Athymis Gestion, is less concerned about risks posed to government bond investors. “The German Bund is risk-safe, and 60% of French government debt is today owned by Asian investors, who I believe will not quickly resort to mass-selling of their holdings.”
Delaunay is more worried about the seeming unresponsiveness of markets to external events like the civil war in Iraq and the downing of the passenger airplane in rebel-held Eastern Ukraine earlier this month. “This is abnormal, but after all this period of low volatility could be a long-term phenomenon as well.”