Shifts in the portfolio holdings of euro area investors in the midst of COVID-19: Looking-through investment funds

We study the impact of the COVID-19 shock on the portfolio exposures of euro area investors. The analysis "looks-through" holdings of investment fund shares to first gauge euro area investors' full exposures to global debt securities and listed shares by sector at end-2019 and to subsequently analyse the portfolio shifts in the first and second quarters of 2020. We show heterogeneous patterns across asset classes and sectors, but also across less and more vulnerable euro area countries. In particular, we find a broad-based rebalancing towards domestic sovereign debt at the expense of extra-euro area sovereigns in the first quarter of 2020, consistent with heightened home bias, which however levelled off in the second quarter. On the contrary, for listed shares we find that euro area investors rebalanced away from domestic towards extra-euro area securities in both the first and the second quarter, which may be associated with better relative foreign stock market performance. Many of these shifts were only due to indirect holdings, corroborating the importance of investment funds in assessing investors' exposures-especially for households, insurance companies and pension funds-in particular in times of large shocks. We also confirm the important intermediation role played by investment funds in an analysis focusing on the large-scale portfolio rebalancing observed between 2015 and 2017 during the ECB's Asset Purchase Programme.