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January 6, 2013 3:29 am
As we nurse our hangovers into a new year of zealous resolutions and hopeful anticipation of a business period filled with more ups than downs, this is the time when pundits are at their most active in offering views on the coming 12 months. The chances of making an accurate prediction is as likely as finding a bevy of black swans swimming majestically down the Thames in London, but why break with tradition?
Starting with what we know, 2012 will go down in history as the year in which no news proved to be the best news possible for the investment community. We feared a eurozone calamity and, up until midyear, a Greek exit and Spanish bankruptcy seemed inevitable. However, this bearish view had not reckoned on the agile manoeuvrings of the eurozone apparatchiks, which had the Troika chefs cooking up a Greek fudge of tremendous proportions. But it did the trick, at least in 2012. The Greek restructuring programme satisfied the markets and in this period of renewed calm monthly flows into bond funds reached progressively new heights.
By November, according to Morningstar data, the heat had begun to come out of the sector, but not before European bond fund managers had recorded their best year since the turn of the century. With just one month of the year to go, bond fund sales (excluding ETFs) were close to bubbling through the €200bn high-water mark, so the final result should see the total edge comfortably above that.
In fact, so dominant were the net sales of fixed income funds that other investments were of no more than marginal interest. Mixed asset funds had a good run, but they were sluggish compared with 2010.
As for equity funds, a good December may mean break-even for the year’s sales total but anything less than an aggressive rebound will mean a second year of deficit. Taking a more positive view, we do seem to be at a turning point that could auger well for equities in 2013, at least in the first quarter. Stock funds seem to be back on the buy list and with the quantitative easing programmes pulling purse strings open for the foreseeable future, many expect a risk-on period that will benefit equity providers. News that the US has not gone over the fiscal cliff will encourage this view, but we should be careful not to assume the obvious.
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The asset allocation predictions of fund selectors promise a near 4 per cent switch in favour of equities in 2013, but a similar expectation existed a year ago and was never fulfilled. The opportunity is recognised and there is a desire to commit but a lack of confidence remains a drag.
At a country level, opinions are much more varied, with German advisers hinting at a sizeable switch into non-eurozone government bonds while the Italians, Swedes and the French are looking to boost allocations into absolute return products. At the channel level, the drive towards equities seems to be strongest among funds of funds and retail bank platforms. For the more sophisticated discretionary advisers bonds continue to be the product of choice.
All this boils down to some improvement in the fortunes of equity funds but it is a directional adjustment rather than a U-turn. And there is another issue that needs to be factored in: price. Insofar as allocations to equities are increased, the flavour of investments is likely to change in favour of low-cost passive products. The retail distribution review has been headline news in the UK. The new year marked its implementation in the UK and while the rest of Europe continues to run on commission, most fund selectors expect a ban at some point in the future. Cost has become a key differentiator in the fund selection process, and as investors migrate to equities, their allocations to core regional or global products are likely to be weighted towards ETFs or low-cost index trackers.
Subject to any news stories that cannot be anticipated, 2013 should be a good or, at least, a much better year for equity funds. Passive products will feature but in the active arena appetite for dividend producing funds, emerging markets and some thematic funds looks set to develop real momentum.
However, the bond story is probably not dead; the headwinds of eurozone uncertainty remain very powerful in suppressing risk appetite, particularly among mainstream investors. Those that are willing to venture back into funds will be looking for absolute returns and income generating products, but these will not necessarily be investment funds.
Structured notes and certificates are now noticeably present in the asset allocation predictions of fund selectors. They have been on the backburner since the Lehman collapse, but they could again become a significant competitive threat in 2013.
Diana Mackay is chief executive of Mackay Williams LLP and publisher of Fund-Radar
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