US funds look for more protection offshore

The trend away from US equities and various fixed interest products as interest rates risks increase is expected to continue, according to the latest Global Asset Flows Review from eVestment Alliance and Casey Quirk.

The review covering figures for the fourth quarter of last year shows a pick-up in flows starting around mid-year. However the total inflow of $204 billion from US-based institutional investors during the quarter remains well below the quarterly peak of $759 billion set in 2006.

The review shows that non-US equity products were the biggest beneficiaries of incoming flows last year, increasing their total assets by 3.2 per cent. This was a dramatic reversal from the flight to safety experienced from late 2008 when investors sought protection in fixed income products, particularly in the US.

The review says: “With interest rates at a cyclical low within the developed economies around the world, investors will continue to seek short duration and inflation-indexed fixed income products. Moreover, to minimise interest rate risk and maximise diversification, the trend towards non-US equity products will continue as investors seek emerging and developed markets believed to have decoupled from the US economy.”

The researchers say that large and stable fund managers will receive the bulk of the inflows as long as confidence in the recovery remains low.

The world’s largest bond manager – PIMCO – for instance was a massive beneficiary of the flight to quality up until mid-2009.

According to the review, the firm, based in Newport CA, was number one for inflows in both global and US fixed interest funds for 2009, which are the two largest categories. The $160 billion into PIMCO’s US fixed interest funds was more than four times as much as that gathered by the second-placed BlackRock.

Generally speaking, more aggressive investment styles suffered losses in flows, while index products grew by about 12 per cent over the year.