Money managers under the microscope
10 years of fund industry evolution: Lipper
“A game of two halves” is a footballing cliché in the UK, but was particularly apt for the European funds industry in 2011. The stock market falls that began in July not only ended the healthy sales activity that had started the year, but triggered a wave of redemptions that rolled through the industry. While these outflows ebbed slightly in the final quarter of the year, there were few who did not feel the cold chill of investors withdrawing from mutual funds by the year-end.
Net sales of long-term funds (i.e. excluding money market funds) in 2010 (305.8 billion euros) exceeded not just those of 2009 (257.7 billion), but also the level achieved in pre-crisis 2006 (265.9 billion). Expectations were therefore high when the first half of 2011 saw inflows of 96.1 billion euros, but this was followed by outflows of 155.9 billion, so that the year as a whole ended in the red (-59.8 billion) for only the second time in a decade (the 2008 total was -391.4 billion euros).
Giving investors the motivation and confidence to move money out of deposits and into funds amid the ongoing political and economic maelstrom remains a crucial challenge for asset managers.
But a longer term view is also useful in fully understanding the current status of the industry and the dynamics that have been at work to shape its current structure.
2011 saw a slight contraction in the number of funds for only the second time in the past decade. The last time this happened (in 2009) the net reduction was 801, while the latest figure was a mere 43. In recent years there have been about the same number of fund launches in both halves of the year, but in the latest year there was an unsurprising tail-off (1,687 over the first half; 1,291 in the second) partly the result of some planned launches being shelved. Just as 2009 did not herald a new dawn of product rationalisation across the industry (there was a net increase of 871 funds in 2010), so it seems very unlikely that 2011 will either. Instead market conditions will largely dictate where product development priorities lie.
With new fund launches such a significant part of asset management companies’ activity, it is worth providing further insights here. Looking back over the past ten years it is possible to see the proportion of growth in the industry that relates to these new launches. Over the first five years (2002-2006), the 79 percent growth in industry assets was attributable to both new launches (60 percent) and existing funds (40 percent).
But when looking across the full 10-year period, the industry would have contracted by 7 percent if no new funds had been launched (a caveat: this does not account for those closures and mergers that may not have taken place if new funds had not arrived). Instead the industry has grown by 74 percent over the past ten years, with nearly half of industry assets (46 percent) now in funds launched over the past decade (made up of 24 percent launched in the first five years and 22 percent launched in the most recent five years).
SHIFT TO CROSS BORDER
Our data enables an informed view not just on where funds are domiciled, but also whether they generate assets from more than one market (the threshold used is 20 percent) and thus really making use of the cross-border passporting that Ucits enables. The importance of such a distinction is illustrated here as the changing ‘balance of power’ in the European industry away from domestically-oriented funds (i.e. primarily sold into one market) and towards cross-border products (i.e. generating sales from multiple markets). The share of assets in the latter has risen from 21 percent at the end of 2001 to 43 percent at the end of 2011.
This change has taken place as a result of several factors, key among them being structural, organic, and specific effects of the recent financial crisis. Structural factors relate to the decisions by some fund companies to re-domicile their funds to Luxembourg or Ireland and then sell them cross-border. Organic factors reflect the greater growth in cross-border funds, for example, by providing products not available locally, or where cross-border funds have expanded to new markets, notably in Asia and Latin America.
The ripple effects of the financial crisis in this context are twofold. First, banks have pulled-back from mutual funds in recent years, which will broadly have had a bigger impact on local, continental European fund markets. Second, those clients willing to invest in this period have been more heavily weighted to institutions and High Net Worth Investors – and both are more likely buyers of cross-border funds.
This trend has taken place despite the fact that some domestic fund markets have actually seen pretty resilient sales activity, most notably the UK, Switzerland, and Sweden. In this way the relative importance of third party distribution compared to proprietary channels of large financial services groups in different markets was all the more apparent in 2011.
Looking more closely at the cross-border industry, it is interesting to see how product preferences have changed over time. Applying some broad groupings to different asset classes, it is possible to see how risk appetites have evolved over the past ten years. No claims are made that this is the definitive way to categorise funds, but it does provide some useful insights. The chart below groups funds into ‘low’ (guaranteed and money market funds, excluding institutional vehicles), ‘low bond’ (developed governments and investment grade corporates), ‘high bond’ (emerging markets, global, high yield), ‘low equity’ (national and regional developed markets), ‘high equity’ (emerging markets, global, small caps) and ‘alternative’ (derivatives, commodities, property).
This analysis reveals that the proportion of assets invested in the lowest risk funds has actually fallen – despite the recent turmoil in global markets. At the other end of the scale, the higher category of equity funds has not only seen an increase in its share of assets over the past ten years, but this has also risen (albeit slightly) since the peak in 2006. But the most significant move has been with ‘high’ bond funds. The impressive sales recorded in 2010 and 2011 have not just been a temporary shift, but have had a fundamental impact on the broad risk profile of assets invested into by cross-border investors. 44 percent of assets are now invested in higher risk bond or equity funds.
ACTIVE VS PASSIVE
The rise in importance of ETFs is well shown in sales activity, with two ETFs being the best-selling equity products of last year. ETFs now make up 7.8 percent of equity fund assets in Europe and when this total is combined with traditional index tracking funds, passively-managed products make up 16.8 percent of the total. This is a rise from 8.8 percent at the end of 2006 and 5.5 percent at the end of 2001, when ETFs had only just arrived on European shores. Of course the more recent increase in the passive proportion of equity funds has come at a time when actively managed funds’ assets have fallen. This being said, ETF equity assets have increased by a whopping 145 percent over the past five years, despite the hit from falling returns that many of these funds will have unavoidably suffered (with the inevitable impact on their promoters’ assets under management).
Clearly, underpinning this success have been institutional investors and all eyes are on whether this base grows as ETF providers increasingly target retail investors. It will be interesting to monitor how far ETF providers are willing to go to reach the mass affluent, traditionally less cost-conscious and – as the chart below illustrates – so far much more likely to invest in actively managed funds.
(Editing by Joel Dimmock) ((email@example.com; Twitter: @reutersJoelD; +44 20 7542 3505)