International/Global Bonds Seen as Hot Growth Sector

Declaring that “there is potential for attractive overseas growth,” Cerulli noted that asset managers are beginning to step up their product development efforts in international/global fixed income.

In a recent Cerulli survey focused on products and strategy trends, 88% of asset managers said that the need for global diversity is either a “significant driver” or “somewhat of a driver” of their product innovation. Nearly half of the Cerulli survey participants have plans for 70% of their product initiatives to be focused on international or global strategies.

Even though new product development in 2010 will still focus overall on international/global equity offerings, Cerulli said plans for global fixed income strategies saw the largest increase over 2008. With a favorable bond-market environment, asset managers have doubled their new product plans centered on global fixed income strategies—new plans for international/global bond funds increased from 14% in 2008 to 32% in 2010.

“Asset managers are looking for ways to be relevant today and in 20 years, and many believe that expansion of investment capabilities overseas is how to get there,” Cerulli researchers assert in the report. “Not only are firms looking to step up their efforts in this area, from investment research to distribution, they are also looking to create internationally focused products.”

It is a sector that has already seen considerable growth. According to Cerulli, international/global bond mutual funds (as categorized by Strategic Insight) grew to $153 billion at the end of May 2010, a 22% increase from year-end 2009. Through year-to- date May 2010, these funds attracted $26.1 billion, down slightly from the $26.2 billion seen for the whole 2009 calendar year.

Cerulli pointed out that many investors were ready to flee the safety of money market funds last year, but not quite prepared to jump back into equities so assets flowed into fixed income offerings. Investors poured $348 billion into fixed income mutual funds in 2009, including $26 billion into international/global bond funds, while domestic equity funds bled $27 billion.

While the draw of equities will increase with a recovering economy, Cerulli said, that process might take time and might produce an overweighting in fixed income. That overweighting is also expected to contribute to the trend toward international/global fixed income as investors search for diversification, the report said.

(Cont...)

PIMCO Leads Product Development  

Even though product development was relatively light in 2009 and through the first quarter of 2010, 19 new globally focused fixed-income products were launched during that period with PIMCO leading the way with three, followed by John Hancock Funds and Touchstone Investments with two new funds each.

Using Morningstar category classifications, the majority of these new funds (seven) are world bond funds (funds that invest at least 40% of bonds in foreign markets), five are multisector bond funds (funds that seek income by diversifying their assets among several fixed-income sectors—usually U.S. government obligations, foreign bonds, and high-yield domestic debt securities), and three are emerging markets bond funds (funds that have at least 65% of assets in emerging markets bonds). The remaining new funds are categorized as short-term, high yield, inflation-protected, and currency.

Currently, Franklin Templeton manages the most international/ global bond fund assets with $39.1 billion, followed by PIMCO and Fidelity with $26.3 billion and $23.6 billion under management, respectively. Oppenheimer ($20.5 billion) and Natixis ($12.9 billion) round out the top-five firms. Oppenheimer and Natixis, while tops in terms of assets, had minimal net flows ($34.6 billion and $143 million, respectively) through May 31, 2010.

More information about Cerulli is at www.cerulli.com .