The investment management industry is split over the mood of institutional investors following the market turmoil caused by the pandemic, a report by Cerulli has found.

The Cerulli Edge - Global Edition, June 2020, report found that interviewees taking part in the report have differing views as to which investors are returning to risk-on sentiment.
Some point to institutional investors with significant risk budgets and long-term horizons, many of which have dry powder at the ready after missing opportunities in the wake of the great financial crisis.

However, other interviewees maintain that institutional investors are, in fact, sceptical of the rapid rebound in equity and are still in wait-and-see mode. One of the respondents, Pictet Asset Management head of intermediary sales, Luca Di Patrizi, said: “Right now, institutional investors are more hungry for insights on the depth of any potential global recession and investment strategies to ride out likely market volatility in the coming years.”

The mixed views follow what has been a turbulent quarter for financial markets, in the wake of the Covid-19 pandemic. At the height of the crisis, European mutual equity funds experienced historic outflows, with €71bn leaving the asset class in March, according to Broadridge data.

However, early signs suggest that those flows are already returning. For example, Calastone, the transaction network, estimates UK equity funds attracted an estimated £2.6bn in flows in April, six times the average, as some investors sought to take advantage of markets trading at four-decade lows.

Further pointing towards money going back into more risky assets and out of products linked to cash, flows into UK money market funds (which soared in March) have also slowed, says Calastone’s head of global markets, Edward Glyn. Elsewhere, Morningstar’s provisional April data shows nearly €19bn of flows back into equity. In contrast, there were huge flows, nearly €60bn, into money market funds as investors continued to seek stable, liquid allocations close to cash.

Cerulli’s report also found that during March, when the chaos began, the coronavirus pandemic made a mockery of traditional safe havens. Not only was there a mass exodus from equity funds, but also bonds, which traditionally move in opposite directions.

Outflows hit all asset classes, although alternatives, safeguarded by the different redemption terms and valuation cycles of closed-end fund structures and private markets, were not dumped to the same degree as their liquid siblings, Cerulli stated.

“A long-held belief that bonds hold their value in times of volatility has made them a traditional haven. Not so in March, when an estimated €175bn was withdrawn from fixed-income funds, almost eight times more than the €22bn of outflows the month before,” Cerulli associate director, European institutional research, Justina Deveikyte, said.

Sharp falls and ensuing outflows hit every bond category, but high-yield investors in euro-denominated mutual funds in riskier areas, such as emerging markets and corporate debt, were hardest hit.

In some cases, extreme volatility and outflows saw asset managers gating bond funds in the face of wide spreads between the funds’ net asset value and intra-day prices. Nordic bond funds were hardest hit.

The suspensions have caught the attention of regulators, Deveikyte said. French and German watchdogs have started demanding daily updates of investor withdrawals from open-end funds. The authorities in Luxembourg and Ireland are monitoring the sector, the former by sending weekly questionnaires to asset managers.

In Sweden, alarm is growing that high-yield corporate bond investors were not aware of the risks they faced, triggering some calls on funds to adjust their marketing practices. In Germany, where the only tool on offer for funds facing a liquidity squeeze is fund suspension, regulator BaFin is exploring solutions via swing pricing and redemption gates.

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