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May 11, 2015

Monday Morning Memo: Income funds–a trend driving equity fund flows

by Detlef Glow.

REUTERS/Joshua Roberts

REUTERS/Joshua Roberts

It is common knowledge that investors often search for new sources of regular income when they can’t achieve their investment targets with “plain-vanilla” bonds. Even corporate or high-yield bonds in many cases do not offer a sufficient interest rate. In this regard, some emerging fund-flow trends support new product types such as asset-allocation/multi-asset products, as well as old-fashioned strategies such as income funds. But, how important are these trends for overall fund flows?

The trend toward asset-allocation products is without a doubt a key driver of overall fund flows; asset-allocation/multi-asset products were the best selling products for 2013 and 2014. On the other hand, income funds did not really show up on the radar screen. But, as shown in Graph 1, this fund category has been responsible for a big chunk of the overall inflows into equity funds over the past four years.

Graph 1: Estimated Net Sales of Equity Funds and Income Funds (Euro Millions)

15-05-11 Flows Income Funds

Source: Lipper

As depicted in Graph 1, income funds had rather shy net inflows of €3.8 bn for 2010, which equaled 4.6% of the overall flows into equity funds that year. But during the euro crisis in 2011 the rise of income funds began; these funds enjoyed net inflows of €3.5 billion, while equity funds posted net outflows of €18.5 billion for the year. For 2012 income funds reached their peak in relative terms: the inflows of €9.4 billion accounted for 35.4% of the overall inflows into equity funds for the year. Even as income funds showed for 2013 the lowest market share (20.3%) in terms of net inflows, 2013 was the year with the highest absolute inflows into income funds (+€18.4 billion). For 2014 more than every fourth euro (27.4%) invested by European investors into equity funds were invested into income funds (+€16.8 billion).

But, why is this trend not seen in the overall sales numbers? Opposite to asset-allocation/multi-asset products, the universe of income funds is split into a number of product categories, as shown in Graph 2.

Graph 2: Estimated Net Sales of Income Funds by Product Category (Euro Millions)

15-05-11 Flows by Asset Type

Source: Lipper

Global income funds seem to have dominated the scene with regard to net sales since 2010, but in 2013 European equity funds started to gain more investor interest and in 2014 took over the position as the best selling income funds sector (+€6.7 bn) from global income funds (+€6.1 bn).

Are U.K. income funds back in the favor of European investors?

Another interesting fact is that 2014 appeared to be the year when U.K. income funds returned to favor with European investors; it was the only year with net inflows (+€1.8 billion) into this product category during the past five years. But, a view of net sales shows that even though four of the ten best selling products were from the Equities UK Income sector, this trend was mainly driven by CF Woodford Equity Income, which gathered €5.1 billion for 2014 (Table 1). These flows were enough to bring the fund up to Number 8 among the ten largest funds in terms of assets under management (as shown in Table 2).

Table 1: Estimated Net Sales of Income Funds, 2014 (Euro Millions)

15-05-11 Top 10 ENS

Source: Lipper

The trend toward European equities within the income fund categories is not really surprising, since investors are looking for income, and European companies show high dividend yields and pay their dividends mainly as cash dividends. In other regions at least part of the earnings is used for share buybacks or other corporate actions in the favor of shareholders instead of the cash being distributed to the shareholders.

Table 2: Assets under Management of Income Funds, December 31, 2014 (Euro Millions)

15-05-11 Top 10 AUM

Source: Lipper

The views expressed are those of the author, not necessarily those of Refinitiv.

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