Emerging market debt funds are yet to fully recover from Covid-19

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Fund flows at the largest emerging market bond managers by assets under management (AUM) have struggled in 2020, with the coronavirus pandemic having taken a toll on higher-risk investments, according to the latest issue of The Cerulli Edge – European Monthly Product Trends. 

Overall, European AUM in emerging market bond funds – EUR275.8 billion (USD327.5 billion) as of September 2020 – have so far failed to match the heights of 2019. AUM ended last year at EUR314.2 billion, meaning September’s position represents a steep 12.2 per cent decline. This experience contrasts with those of the wider markets, which have generally seen a resurgence since March’s downturn.

“Emerging market bond flows have fluctuated in Europe over the past few years, registering net withdrawals of EUR19.4 billion in 2015 – when currency volatility and the fact that some countries were struggling to service their debt meant investors were unwilling to be over-exposed – before recovering to deliver record inflows of EUR60.6 billion in 2017,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates.

But despite 2020 having been a largely bleak year for many of Europe’s prominent emerging market managers, some have seen their offerings prosper. Some managers are betting on a recovery – a spate of launches have occurred this year with a particular emphasis on sustainable investing.

Some emerging market bonds have greater appeal than others. For example, confidence in Asia’s ability to recover quickly from the pandemic saw Italian investors invest more than EUR205 million specifically in Chinese bond funds in September.

As the economic fallout from the coronavirus continues to squeeze interest rates in developed markets, investors will look further afield for yield. Bonds have slowly crept toward or into negative real-yield territory because of slow economic growth.

“For the time being, retail investors are mainly opting for low-yielding, liquid, highly rated sovereigns. With March’s market crash still in mind, it may be a while before cautious investors in Europe return to higher-risk, higher-return strategies,” notes Zumbo.

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