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Global fund inflows down to fixed income – Morningstar

Fixed income carried the can during the first half of the year with inflows coming in at $236bn.
by Thomas Blott
Both the GAM and JP Morgan funds invest in Asia-Pacific including Japan, but the main difference is the markets they invest in. GAM is more focused on developed markets, while JP Morgan has a mix of both developed and emerging markets. The difference lies in their benchmarks: GAM’s benchmark index, the MSCI Pacific Index, captures only five developed markets in the region, according to Ng. JP Morgan’s benchmark index, the MSCI AC Asia-Pacific Index, includes five developed market and nine emerging market countries in Asia-Pacific. Fund vs benchmark index (top five country allocations) GAM fund MSCI Pacific Japan 60.16% Japan 65.71% Australia 16.20% Australia 20.06% Hong Kong 15.91% Hong Kong 10.05% China 3.61% Singapore 3.71% Singapore 2.70% New Zealand 0.48% JP Morgan fund MSCI AC Asia Pacific Index Japan 39.50% Japan 37.99% China 19.30% China 17.01% Australia 9.80% Australia 11.60% Hong Kong 8.40% South Korea 8.54% Taiwan 6.20% Taiwan 6.93% Source: MSCI, GAM, JP Morgan Asset Management Ng noted that the GAM fund has an unconstrained strategy and does not need to follow the benchmark. However, its portfolio somewhat resembles the MSCI Pacific Index on a country level. “When I look back to its portfolio history, I think the country allocation has been similar to that of the benchmark that they use,” Ng said. Not only do their benchmarks differ in country allocations, but in sectors as well. On the benchmark level, one of the key differences is the allocation to information technology: the MSCI Pacific only has around 8% in the sector, while the MSCI AC Asia Pacific Index has 20% in IT. It is not surprising then that the JP Morgan fund has 25% in IT, Ng said. Fund vs benchmark index (top five sector allocations) GAM fund MSCI Pacific Financials 23.97% Financials 21.51% Industrials 22.40% Industrials 16.78% Consumer discretionary 21.66% Consumer discretionary 15.03% IT 8.77% IT 8.40% Real estate 7.62% Materials 7.99% JP Morgan fund MSCI AC Asia Pacific Index Financials 26.80% Financial 21.32% IT 25.80% IT 20.46% Consumer discretionary 15.50% Consumer discretionary 12.49% Industrials 9.20% Industrials 12.18% Materials 8.70% Materials 6.97% Source: MSCI, GAM, JP Morgan Asset Management Although both funds look for growth opportunities in the region, the GAM fund prefers equities with lower valuations than the JP Morgan fund, Ng said, adding that the GAM product has a lower price-per-earnings multiple. In comparison, the JP Morgan fund is more growth-oriented and the managers are willing to pay for companies with higher valuations provided they show long-term sustainable growth prospects, he added. Differences in strategy Both funds use different investment strategies. For the GAM fund, managers Michael Lai and Ben Williams employ a top-down and bottom-up approach, according to Ng. The top-down approach is mainly a decision about the fund’s allocation to Japan, depending on macroeconomic factors. After that, they use a bottom-up approach to pick the stocks in Japan and the rest of the APAC markets based on various fundamentals. For the JP Morgan fund, the fund managers, Aisa Ogoshi, Mark Davids and Robert Lloyd, identify “core franchise” and “quality growth” stocks, according to Ng. Core franchise stocks refer to companies that have financial strength and strong corporate governance attributes.. Quality growth stocks are those that have long-term growth prospects.

Global funds and exchange-traded funds had $54bn of inflows in the first half of the year, although this was entirely down to inflows to fixed-income funds, according to Morningstar’s Global Fund Flows report.

Fixed income’s $236bn in inflows more than made up for the lacklustre performance of all other asset classes during the first six months of the year, Morningstar said.

The attraction of fixed-income funds is not altogether surprising given that last year’s sell-off in the asset class has now created attractive entry points.

US Treasuries and German bonds lost 17% and 25% in US dollar terms last year respectively as the Federal Reserve hiked interest rates seven times in a bid to tame inflation.

Morningstar noted that if you strip out January, which saw a particularly strong performance, fund and ETF net flows for the first half were basically zero.

Meanwhile, ETFs enjoyed their 113th straight month of inflows in June, while Morningstar also noted that actively managed ETFs are slowly gaining acceptance as they grew at an organic rate of 14% during the first half compared with 3% for passive ETFs.

Actively managed ETFs saw the biggest growth in Asia during the first half, up 78%, although Morningstar noted that this was starting from a low base.

In terms of fund managers themselves, JP Morgan posted the highest organic growth rate at 5.6%, while in absolute terms, iShares was the winner with $66bn.

Meanwhile, despite the backlash against ESG and it falling out of favour last year with investors due to its correlation with growth stocks, sustainable funds witnessed $51.2bn of inflows during the first half compared with $2.4bn for non-sustainble funds.

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