Survival of the fattest?

October 19, 2012

Is there room only for the biggest, most aggressively-marketed funds in crisis-hit Europe?

Europe’s ten best-selling funds have attracted nearly a third of net sales across bonds, equity and mixed assets so far this year, as the grey bars show in the following chart from Thomson Reuters’ fund research firm Lipper.

TEN MOST SUCCESSFUL FUNDS’ NET SALES AS A PROPORTION OF ALL SALES

The numbers — which exclude ETFs — are even more staggering if looking at at the concentration of sales into groups/companies, rather than at fund level.

Then, data compiled by Fitch ratings using Lipper shows that over the past three years Europe’s ten biggest firms have attracted around 80 percent of  flows into fixed income, equity and mixed assets.

“Everyone has been surprised by the extent of the fund flow concentration,” said Aymeric Poizot, Head of Fitch Ratings  EMEA Fund & Asset Manager Rating Group. He believe it is time for a “serious strategic review” at smaller funds to allow them to compete in an increasingly globalised fund market where retail investors are turning back to seemingly risk-free bank deposits and new skills are needed to hunt for increasingly rare yields for bigger investors.

In Fitch’s latest European Asset Management report published this week, the ratings agency said it expects managers to strive to establish, bigger, representative flagship products. But not all will have the means to do this:

New areas of growth, fueled by globalisation or bank deleveraging, include: global equity or bond products; emerging markets; senior secured high yield; direct lending; and real assets. Many of these are new to asset managers, who must develop scale and credibility if they wish to successfully compete in these areas. Yet in most cases, doing so demands serious investment in terms of local analysts, sourcing channels, and technical and legal knowledge. Fitch believes that acquisition and team lift out are the only viable options. However, many managers are currently unable to invest and will consequently find themselves in a less competitive situation in the near future.

But in a note published this week, Ed Moisson, Head of UK and cross-border research at Lipper points out that “the winner takes all” phenomenon is not the whole story, even if more and more funds are struggling to generate any inflows at all.

If you look at the ten most successful funds as a proportion of all funds with inflows, rather than as a proportion of the whole industry, a slightly different picture emerges. Their share of the pie is actually smaller then in 2010 (see the orange columns in the chart above). Moisson writes:

The trend revealed is of an increasing domination of the most successful funds between 2006 and 2010 but, unlike for the comparison with all funds (irrespective of whether their flows were positive or negative), this dominance has dropped back in 2011-2012.

Also important is the fact that the number of funds has been rising. The universe of funds included in the current analysis totalled 18,542 in 2003, but has grown to 22,726 in 2012, up 22.6%. Despite the ripple effects of the financial crisis, the market place has still got a lot more crowded.

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