February 6, 2017

Monday Morning Memo: 2016–A year of changing market dynamics?

by Detlef Glow

Looking at the headline figures, the year 2016 could be considered a good year for the European fund industry, since the assets under management (+€9.4 tr) hit an all-time high at the end of December 2016. In addition, the European fund industry enjoyed net inflows of €268.7 bn over the course of 2016. But a more detailed look at the underlying data unveils some trends that could change the market environment.

Assets Under Management in the European Fund Industry

The assets under management in the European fund industry increased from €8.9 tr to €9.4 tr over the course of the year 2016. This increase was mainly driven by net inflows (+€268.7 bn), while market performance contributed €209.7 bn.

Since exchange-traded funds (ETFs) have become an important part of the European fund industry, it is essential to review that market segment separately to get a better picture of the underlying trends in the market, although the numbers for ETFs are included in the overall numbers of the European fund industry.

The European ETF industry enjoyed further increasing popularity with all kinds of investors in 2016. This popularity was seen also in the development of the assets under management; assets held by the European ETF industry increased for a fifth consecutive year and marked a new all-time high at €514.5 bn at the end of December 2016, up from €427.9 bn at the end of 2015. Opposite to their actively managed peers, the growth within the European ETF segment was mainly driven by the performance of the underlying markets (+€45.4 bn), while net sales contributed €41.1 bn.

Exhibit 1. Assets Under Management in the European Fund Industry by Product Type (Euro Billions)

European Fund Market Review 2016

Source: Thomson Reuters Lipper

With regard to the overall number of funds, it was not surprising that equity funds (€3.4 tr) were the asset type with the highest assets under management, followed by bond funds (€2.4 tr), mixed-asset products (€1.4 tr), money market funds (€1.2 tr), alternative UCITS funds (€0.6 tr), real estate funds (€0.2 tr), and “other” products (€0.2 tr) as well as commodity funds (€0.03 tr).

Exhibit 2. Market Share by Asset Type (December 31, 2016)

European Fund Market Review 2016

Source: Thomson Reuters Lipper

European Fund Flow Trends 2016

Generally speaking, the year 2016 seemed to be another good year for the European fund industry, even though the net inflows of €268.7 bn into mutual funds were well below the record inflows of the years 2015 (+€386.0 bn) and 2014 (+€351.0 bn). The number for 2016 was far above the long-term average of €162.2 bn. With regard to these numbers, it was not surprising that 2016 was also a good year for the promoters of ETFs; ETFs contributed €41.1 bn to the inflows.

Exhibit 3. Estimated Net Flows in the European Mutual Fund Industry (Euro Billions)

European Fund Industry Review 2016

Source: Thomson Reuters Lipper

Fund Flows Into Long-Term Mutual Funds

A more detailed view by asset type unveils that not all asset types did well in 2016. With regard to the low-interest-rate environment, it was surprising that bond funds (+€110.9 bn) were the best selling asset type, followed by alternative UCITS products (+€37.5 bn) and the previous year’s best selling asset type, mixed-asset funds (+€25.9 bn), as well as real estate funds (+€9.6 bn) and commodity funds (+€4.6 bn). It was quite surprising to see that equity funds (-€28.2 bn) posted the highest net outflows, bettered by “other” products    (-€2.2 bn). These fund flows added up to overall net inflows of €158.0 bn into long-term investment funds for the year 2016. These flows may have indicated that European investors were not satisfied with the performance of their mixed-asset funds and alternative UCITS funds during the market turmoil at the beginning of the year and therefore bought into bond products; they may have wanted to reduce the equity market risks in their portfolios.

In this regard, it might not have been surprising to see net outflows from equity funds in general, but looking at the details, these outflows may have marked the beginning of a new trend in the equity segment. While the overall outflows in the equity segment stood at €28.2 bn, equity ETFs posted net inflows of €15.5 bn. This meant that actively managed equity funds faced net outflows of €43.7 bn. The different level of fund flows between equity ETFs and actively managed equity funds might be seen as a change in market dynamics caused by investor behavior and therefore as a new trend in the European fund market.

Exhibit 4. Estimated Net Sales by Asset Type, 2016 (Euro Billions)

European Fund Industry Review 2016

Source: Thomson Reuters Lipper

Fund Flows into Money Market Products

Money market products (+€110.7 bn) were the second best selling asset type overall for 2016. Mutual funds investing in money market instruments enjoyed net inflows of €111.4 bn, but their passive peers (ETFs) faced slight net outflows of €0.7 bn.

This flow pattern led the overall fund flows to mutual funds in Europe to net inflows of €268.7 bn for the year 2016.

Money Market Products by Sector

Money Market GBP (+€56.2 bn), followed by Money Market EUR (+€29.4 bn) and Money Market USD (+€24.7 bn) were the three best selling sectors overall for the year 2016. At the other end of the spectrum Money Market HUF (-€0.8 bn) suffered the highest net outflows in the money market segment, bettered somewhat by Money Market JPY (-€0.8 bn) and Money Market CHF (-€0.6 bn).

Fund Flows by Sectors

Within the segment of long-term mutual funds Bond Global (+€22.1 bn) was the best selling sector, followed by Equity Global (+€19.6 bn), Bond EUR Short Term (+€15.3 bn), and Equity Emerging Markets Global (+€14.7 bn) as well as Bond Emerging Markets Global in Hard Currencies (+€14.3 bn).

Exhibit 5. The Ten Best and Worst Selling Sectors for 2016 (Euro Billions)

 European Fund Industry Review 2016

Source: Thomson Reuters Lipper

At the other end of the spectrum Equity Europe (-€20.6 bn) suffered the highest net outflows from long-term mutual funds, bettered by Equity Japan (-€13.1 bn) and Bond EMU Government (-€11.1 bn) as well as Bond Convertibles Global (-€6.7 bn) and Equity Europe Small and Mid Cap (-€6.1 bn).

Assets Under Management by Promoters

A closer look at the assets under management in the European mutual fund industry shows that BlackRock (€640.3 bn) was by far the largest fund promoter in Europe, followed by JP Morgan (€302.2 bn) and Deutsche Bank (€262.6 bn) as well as UBS (€261.8 bn) and Amundi (€226.8 bn). Looking at these numbers, one needs to take into account that JP Morgan is the only fund promoter of the leading five fund promoters in Europe that does not offer ETFs.

Exhibit 6. The 20 Largest Promoters by Assets Under Management in Europe, 2016 (Euro Billions)

European Fund Market Review 2016

Source: Thomson Reuters Lipper

Fund Flows by Promoters

BlackRock, with net sales of €46.7 bn, was the best selling fund promoter for the year 2016 overall, well ahead of Aviva (+€22.0 bn) and Nordea (+€18.3 bn). Taking into account that the flows from BlackRock contain €26.6 bn from their ETF branch iShares means that the traditional mutual funds branch of the business saw net inflows of €20.1 bn; i.e., the ETF business was—in terms of net flows—bigger than the traditional mutual fund business of BlackRock. These numbers could be another hint that the European mutual fund industry is undergoing a structural change. In addition, this means that if one looked only at traditional mutual funds, BlackRock would have finished the year as the second best selling fund promoter behind Aviva.

Exhibit 7. Twenty Best Selling Promoters, 2016 (Euro Billions)

 European Fund Industry Review 2016

Source: Thomson Reuters Lipper

Considering the single-asset bases, BlackRock (+€23.5 bn) was the best selling promoter of bond funds for 2016, followed by PIMCO (+€10.6 bn), Vanguard Group (+€6.9 bn), and Eurizon Capital (+€5.8 bn) as well as AB (+€5.6 bn).

Within the equity space KBC (+€10.4 bn) stood at the head of the table, followed by State Street (+€7.2 bn), Vanguard Group (+€5.3 bn), and Amundi (+€4.1 bn) as well as Fundsmith LLP (+€3.9 bn).

Union Investment (+€4.3 bn) was the leading promoter of mixed-asset funds in Europe for 2016, followed by Eurizon Capital (+€4.2 bn), Anima (+€2.7 bn), and Allianz (+€2.5 bn) as well as Pioneer Investments (+€2.2 bn).

Nordea (+€11.1 bn) was the leading promoter of alternatives funds for the year, followed by Invesco (+€6.8 bn), Aviva (+€5.0 bn), and JP Morgan (+€4.9 bn) as well as Old Mutual (+€3.0 bn).

Promoter Activity–Fund Launches, Liquidations, and Mergers

Even though 2016 seemed to be a good year for the European fund industry, promoter activity with regard to fund launches, liquidations, and mergers did rather indicate a consolidation. This was not a new trend in Europe, since the number of funds declined for a sixth consecutive year in 2016. The main reasons for the mergers and liquidations at the fund level were mergers of fund managers as well as restructurings of the general product offerings; i.e., some fund promoters merged funds with a similar investment objective to strengthen their product ranges. Lower profitability because of the lack of assets under management might have been another reason fund promoters merged or liquidated some funds. Generally speaking, the activity of fund promoters with regard to fund launches and liquidations was in line with the activity over the years 2014 and 2015, while the number of fund mergers was quite a bit below the numbers for the previous years.

Exhibit 8. Fund Launches, Liquidations and Mergers

European Fund Market Review 2016

Source: Thomson Reuters Lipper

The European fund promoters liquidated 1,672 funds over the course of 2016, while 1,003 funds were merged into other funds. In contrast, European fund promoters launched 2,119 funds. This meant the European fund market declined by 556 funds over the course of 2016.

A more detailed view shows that equity funds showed the highest number of mergers (330) and liquidations (541), while mixed-asset funds showed the highest number of fund launches (707). With regard to the overall number of funds, it was not surprising that equity funds showed the highest number of fund mergers and liquidations, since this asset type had by far the highest number of products in the market. It was also not surprising that mixed-asset products showed the highest number of fund launches because the fund industry reacts to investor behavior. Since it takes a while for a new fund to come to market, the high net flows into mixed-asset products for 2015 might have been one driver for these launches. Another driver might have been the fact that investors were looking for alternatives to bond products, since the U.S. Federal Reserve started to raise interest rates, meaning in turn that investors may lose money if they are still invested in bond products, once the cycle of rate hikes starts to speed up. Since the performance of many “old” mixed-asset products was heavily dependent on developments in the bond markets, it was not surprising that fund promoters liquidated or merged these products into their new product offerings, since this helped to streamline the product ranges and generate assets under management for the successor funds.

Exhibit 9. Fund Launches, Liquidations and Mergers in 2016 by Asset Type

European Fund Market Review 2016

Source: Thomson Reuters Lipper


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