by Jake Moeller.
The Gregorian calendar has one considerable fault: Each year December comes around much more quickly than expected! The upside, however, is that it provides financial market participants the opportunity to reflect, evaluate, and consider how they will respond to the challenges for the upcoming year.
Compliance touch points are increasing
According to Thomson Reuters Regulatory Data solutions, there were some 51,000 regulatory updates in 2015 globally. For U.K. and European fund managers there has been much to ponder in 2017, and 2018 will undoubtedly provide the same. Brexit looms large. MIFIDII, EMIR, Basel III, Solvency II, AIFMD, and Dodd Frank as well as ongoing ESMA and FCA pronouncements are forcing fund managers to look closely at their business models.
Yet, as we move into 2018 the pan-European fund market is without doubt very buoyant. According to Thomson Reuters Lipper data, the industry passed €10 trillion of total AUM in 2017. Net flows of some €600 billion as of the end of Q3 represented the highest net flows total since 2004. Barring any unforeseen crises before Christmas, 2017 will be a bumper year indeed.
Exhibit 1. European Mutual Fund Market – Net Fund Flows by Product Type to Q3 2017 (€bn)
Despite the rising tide, product dynamics have changed. From 2004 to 2014 passive funds and ETFs contributed on average 7% of the total annual sales of all funds in Europe. For 2015 this average jumped to 32%. For 2016 it was 24% and for 2017 (through Q3) it was around 14%. With its holistic offering BlackRock has, with AUM over €700 billion, twice the European asset base of its nearest rival (Amundi). Is it any surprise then that we have seen active fund groups such as Franklin Templeton and Fidelity launch ETFs in 2017?
Fund consolidation will have to continue
It is impossible to accurately predict how the markets will fare in 2018, but even with these healthy fund flows there must certainly be an impact on the number of funds available for sale to European and U.K. investors. According to Accelerando Associates, the US$16-trillion mutual funds market has some 9,500 mutual funds, with an average fund size of US$1.7 billion. Compare this with Europe where there are some 11,000 cross-border funds with an average fund size of only €260 million.
This cannot be sustainable. Indeed, Lipper data show new fund launches in Europe (including the U.K.) for 2017 (through Q3) are down 49% from 2012. Unsurprisingly, fund concentration in Europe is considerable. The U.K. fund market, for example, contains nearly 40% of its total assets in only 100 funds. This pattern is similar throughout Europe and ostensibly doesn’t auger well for boutique funds unless they are able to garner the attention of increasingly influential fund buyers.
Sales teams may restructure
Fund houses too will face pressure to reduce their sales teams. Accelerando suggests that 80%-90% of fund house revenues are generated from 10%-20% of sales staff; there is the potential to see current sales teams decreased an average of 35% over the next three to five years.
Even with a rising tide 2018 will undoubtedly be a year of consolidating fund ranges, more compact sales teams, and–I suspect–more rules-based product launches.
A late-cycle rotation out of passives could be the joker in the pack–and perhaps a topic for December 2018.
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