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Investors sell off as markets trough

European investors did themselves a disservice in February. They sold out of pretty much all asset classes when markets hit (in some cases) multi-year lows before recovering their losses in the past couple of weeks. The outflows mainly hit active funds, as ETFs saw modest net inflows.


PA Europe

Outflows continued apace from January, with Japanese and European equities now also in the red, along most other asset classes. The biggest net outflows were recorded for developed market corporate bonds at €2.1bn according to Morningstar estimates. European corporate bonds are now up 2.3% since recording a 14-month low in mid-February.

Asia ex-Japan and US equities were also sold off heavily, albeit by less than during the previous month. High yield bonds and emerging market debt also recorded net outflows exceeding €1bn. All these asset classes are now up by between 5 and 16% since their trough in mid-February.

ETFs go against the flow

The outflows in February suggest strong negative sentiment has taken hold. While index-trackers are supposed to be the ideal instrument to express tactical views, investors mainly sold off active funds in February, rather than ETFs.

As active euro-denominated corporate bond funds saw net outflows of approximately €2bn, their index-tracking counterparts saw net inflows. The same story goes for global emerging market and Asia ex-Japan equities: ETFs tracking these asset classes welcomed modest net inflows, while active funds suffered combined net outflows of more than €1bn.

It’s puzzling what could be behind this counterintuitive move. Maybe it’s a statistical anomaly. But it could also simply be placed in the context of ETFs continuing to eat into active funds’ market share. Or maybe ETF investors are just more contrarian and risk-prone than those preferring active funds.