Morningstar Direct SM Asset Flows Commentary: Europe

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1 September Data thru Aug 31 Morningstar Direct SM Asset Flows Commentary: Europe Fixed-Income Suffers as Investors Brace for Rising Rates By Ali Masarwah, European Asset Flow Team Europe s fund industry has been reeling from investors change in sentiment in the past three months. As the U.S. Federal Reserve laid out a timetable for the tapering of bond buying, commonly known as QE3, at the end of May, investors have embarked on a selling spree, redeeming long-term funds on a substantial scale. The rise in 10-year US Treasuries from well below 2% in May to close to 3% early in September made bond fund investors nervous over the further potential for rates to rise, prompting a sell-off of USD and EUR bond funds (the effects of which have taken their toll on US asset managers, most prominently PIMCO). A less-straightforward consequence was the rapid deterioration of the sentiment for emerging-markets bonds and equities, which had to date profited from massive capital flows brought about by the glut of cheap money. The prospects for monetary tightening and higher U.S. interest rates presented investors with more arguments to sell emerging-markets assets. It remains to be seen if the refusal of the Federal Reserve on Sept. 18 to slow down asset purchases for now will bring about a relaxation of investors minds or more nervous fingers going forward. As the central banks of several emerging countries, among them Brazil, Indonesia and India, rushed to protect their ailing currencies by raising short-term lending rates, pessimists on emerging markets could arguably make out another risk for economic growth in developing markets. The European fund industry was hit with outflows yet again in with long-term funds posting net redemptions of EUR 2.13 billion. Bond funds suffered most with investors withdrawing EUR 7.93 billion. Equity funds saw net redemptions of EUR 683 million. Demand for allocation funds was solid at EUR 4.31 billion, as were inflows into alternative funds that pursue hedge fund-like strategies. Net inflows into this asset class slowed down to EUR 1.44 billion in. While long-term funds suffered outflows in, money market funds profited from the risk-off mode, enjoying net inflows of EUR 7.85 billion after seeing net redemptions for four months running. Due to practically nonexistent returns, these short-term products have seen outflows of EUR billion in the last 12 months.

2 Global Broad Category Group Estimated Net Flow Q2 One Year AUM Allocation 4,309 30,054 88, Alternative 1,444 8,213 28, Commodities (0) (1,558) (1,917) 20 (0.00) Convertibles 522 3,486 11, Equity (683) ,518 1,853 (0.04) Fixed Income (7,930) 23, ,649 1,628 (0.47) Property , Unclassified , All Long Term (2,127) 65, ,751 4,585 (0.05) Money Market 7,847 (26,039) (45,511) Total 5, , ,240 5, Morningstar Fund-Level Categories When drilling deeper into the data for long-term fund categories, the impact of the tapering debate becomes apparent. Of the 10 Morningstar long-term fund categories hit hardest by redemptions, six were global or Asian emerging-markets categories. At the same time, inflows into some unloved fund categories, such as European and eurozone largecap equities, gained traction. Europe large-cap blend equity enjoyed the highest inflows of any Morningstar category in, posting net inflows of EUR 1.6 billion. Among the long-standing favorites, EUR flexible allocation funds also held their own in as did global large-cap blend funds, which enjoyed EUR 1.14, and global equity-income, which welcomed EUR 772 million. The Most-Loved Morningstar Fund-Level Categories Europe Large-Cap Blend Equity 1,606 2,976 2, EUR Flexible Allocation - Global 1,190 2,593 8, Global Large-Cap Blend Equity 1,144 2,561 6, EUR Ultra Short-Term Bond 1,039 1,299 5, Global Equity Income 772 2,047 11, EUR Cautious Allocation 693 1,814 6, Europe Flex-Cap Equity 678 1,220 1, EUR High Yield Bond 654 1,542 4, USD Moderate Allocation 616 1,344 4, Europe Small-Cap Equity , Source: Morningstar Direct Asset Flows

3 The Least-Loved Fund-Level Categories - USD Diversified Bond (1,524) (3,262) (7,338) Global Emerging Markets Bond Local Currency (1,442) (1,966) 7, Global Emerging Markets Equity (1,389) (1,483) 4, Global Emerging Markets Bond (1,221) (2,458) (2,279) Global Bond (1,218) (835) 13, USD Flexible Bond (1,079) (1,109) 14, Asia ex Japan Equity (773) (1,207) (2,870) Asia-Pacific ex-japan Equity (716) (1,016) 2, Asia Bond (708) (1,245) (829) US Large-Cap Equity (680) (657) (1,178) Source: Morningstar Direct Asset Flows Funds: The Investor Giveth, The Investor Taketh Away Turning to the fund level, the outflows from Bill Gross PIMCO Total Return Bond Fund reached new highs in as the PIMCO flagship fund lost EUR 1.1 billion. Year to date, the European version of the US diversified bond fund shows an organic growth rate of (19.74%), which implies the fund has lost nearly a fifth of the assets held at the start of the year due to redemptions. The fund, which carries a Morningstar Analyst Rating of Gold, lost 4.1% in euro terms, underperforming the average US diversified bond fund by 0.8 percentage points and the Barclays US Aggregate Bond TR by 1.3 percentage points in the first eight months of the year. Among other big names, Franklin Templeton s Templeton Global Bond, which holds a Morningstar Analyst Rating of Silver, and Bronze-rated Templeton Global Total Return, lost net EUR 532 million and EUR 640 million, respectively. Moderate allocation fund and former blockbuster Carmignac Patrimoine, which was recently downgraded from Gold to Silver, posted outflows of EUR 455 million. Standard Life Investments Global Absolute Return Strategies, on the other hand, saw only slight outflows. Morningstar analysts placed the fund Under Review following the resignation of Euan Munro, director of multi-asset investing and fixed income. The Luxembourg SICAV version of the fund continued to see inflows albeit at a much slower pace than earlier in the year.

4 Table: Largest 10 funds by AUM Templeton Glb Bond (532) (778) 1,180 34,175 Templeton Global Total Return (640) (510) 7,611 28,774 Carmignac Patrimoine (295) (455) ,066 Standard Life Invmt Global Abs Ret Strat (1) 384 3,944 21,566 PIMCO GIS Total Return Bond Fund (1,100) (2,313) (5,089) 19,808 M&G Optimal Income Fund ,981 18,381 AB Global High Yield Portfolio (624) (134) (1,110) 17,678 IP High Income 2 (46) (358) 16,306 PIMCO GIS Global Investment Grade Credit (305) (379) (1,522) 15,420 Deka-ImmobilienEuropa (13) (7) ,320 BlackRock index funds continued to rake in fresh new money with the BlackRock ISF Developed World Index enjoying EUR 871 million in new net money, the highest inflows into any long-term fund in. The picture was not all bleak for Allianz subsidiary PIMCO as the euro-hedged version of PIMCO GIS Diversified Income Fund Hedged Fund posted inflows of EUR 597 million. The unbroken drive for income funds is reflected by high demand for JPMorgan Income Opportunity and Allianz Income and. Among others, Franklin European profited from increased demand for European equity funds. Fund Groups: The Bond Guys Take It on the Chin Of the European providers with the highest inflows, BlackRock and JPMorgan stand out in. Save global emerging-markets funds, which had sizable outflows, BlackRock global and European large-cap blend funds profited from the rising demand for developed-world equity funds. JPMorgan funds show a more diversified picture with US and global bond funds enjoying net inflows, as did US and European large-cap blend equity funds. With net inflows of EUR billion JPMorgan tops the list of asset-gatherers year to date, followed by BlackRock (EUR billion) and Franklin Templeton (EUR billion). Turning to the asset-shedders, the picture is somewhat unsurprising. PIMCO s pain is explained by outflows all across its bond lineup with several emerging-markets and high-yield offerings taking a heavy beating alongside the PIMCO Total Return Bond Fund mentioned above. Alliance Bernstein bled heavily from its AB American Income Portfolio and AB Global High Yield Portfolio, and Franklin Templeton suffered redemptions not only out of its behemoth bond funds, but also across a wide variety of emerging-markets equity and bond funds. Notably, the previously muchsought Templeton Frontier Markets, which has of late been closed to new investors, suffered outflows of EUR 51 million. This is a reminder that even strong-performing funds that cover hot and trendy market segments tend to be sold indiscriminately on the back of broad asset allocation shifts.

5 Top 10 Providers Flows (excluding money markets, feeders, and funds of funds) BlackRock 1,814 4,078 16, UBS 75 (248) (1,350) 137 Franklin Templeton (1,016) (540) 11, DWS (218) 648 5, PIMCO (2,678) (3,842) 6, Union Investment , Fidelity (573) (90) (2,259) 99 BNP Paribas (1,498) (2,222) (419) 94 JPMorgan 1,151 2,837 17, Schroders (2) 647 1, To learn more about Morningstar Direct Asset Flows, visit us at this link. Data Notes The figures in this report were compiled on 19 September. Over 25,000 of 30,000 funds that Morningstar tracks from over 1,200 fund companies across 29 domiciles are included. Funds domiciled in Sweden are not included because they report assets on a quarterly basis only. growth rate is flows as a percentage of beginning assets.