Global Investing

Survival of the fattest?

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.

LIPPER-ETF tiddlers for the chop?

(The author is Head of EMEA Research at Thomson Reuters fund research firm Lipper. The views expressed are his own.)

By Detlef Glow

The exchange-traded fund (ETF) market has shown strong growth since its inception in Europe. Many fund promoters have sought to capitalise on this, seeking to differentiate themselves from rivals and match client needs by injecting some innovation into their product offerings. This has led to a broad variety of ETFs competing for assets, both in terms of asset classes and replication techniques.

Looking at assets under management, however, the European ETF market is still highly concentrated. The five top promoters account for more than 75 percent of the entire industry. On a fund-by-fund basis the concentration is even greater.

The ETF ‘Death List’

Our colleagues at Lipper have put together some eye-catching data on developments in the ETF industry. You can read the slides here.

Most intriguing is the idea of a slumbering cohort of 241 exchange-traded funds forming what Lipper calls a ‘Death List’; ETFs which are more than three years old, but which have failed to drive assets up to the 100 million euro-mark.

Detlef Glow, Lipper’s head of Research for EMEA, notes these funds might well be thought to be under review by their promoters, but he hasn’t spotted any particular trend towards consolidation. Why?

Lipper: Active vs. Passive, Round 3,462

Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. Since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.

Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.

The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.

Healthy flows into money market funds

Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.

The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.

Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.

Start building the bunker

They keep telling us that the recession is over so maybe now’s the time to start worrying about inflation. That’s the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it’s not surprising that the gold price broke through $1,000 an ounce this week.

“Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar,” said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. “They are using gold as an insurance policy.”

Just another Snark hunt?

The Lewis Carroll poem The Hunting of the Snark (An Agony in 8 Fits), follows the misadventures of a group of seafarers, amongst them a banker and a broker, as they search for the elusive mythical beast. We are warned at the outset that catching Snarks is all well and good, but beware if your Snark is a Boojum, because - well, we’ll come to that.

Alpha looks set to become as equally elusive in the next 20 to 30 years as investors switch to passive investing and exchange-traded funds (ETFs) in greater numbers, and the amount of information available to all market participants increases.

Suzanne Duncan, financial markets industry leader at the IBM Institute for Business Value, argued at the Fund Forum in Monaco this week that some 85 to 90 percent of investment returns in the next 20 to 30 years will be beta returns, as investors become increasingly disillusioned with paying for actively managed funds that fail to deliver.