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January 29, 2018

Monday Morning Memo: European Investors Show for 2017 an Increased Appetite for Risk

by Detlef Glow.

European Fund Industry Review, 2017

Looking at the headline figures, the year 2017 could be considered a good year for the European fund industry, since the assets under management (+€10.4 tr) hit an all-time high at the end of December. In addition, the European fund industry enjoyed a new record in net inflows (+€756.9 bn) over the course of 2017. But not all funds and fund promoters benefited from the massive inflows into mutual funds over the course of 2017. In addition, the European fund industry witnessed an increasing number of mergers and acquisitions. That would not be surprising if only small companies were bought by large ones, but we also experienced, for example, the merger between Aberdeen Asset Management and Standard Life in the active space and the acquisition of Source by Invesco Powershares. This brought the rather-small European business of Powershares into the ten top European ETF promoters by assets under management.

Assets Under Management in the European Fund Industry

The assets under management in the European fund industry increased from €9.4 tr to €10.4 tr over the course of the year 2017. This increase was mainly driven by net inflows (+€756.9 bn), while market performance contributed €317.2 bn.

Since 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. However, the numbers for ETFs are included in the overall numbers for the European fund industry.

The European ETF industry enjoyed in 2017 further increasing popularity with all kinds of investors. This popularity was seen 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 €633.9 bn at the end of December 2017, up from €514.5 bn at the end of 2016. In line with their actively managed peers the growth within the European ETF segment was mainly driven by net inflows (+€94.7 bn), while the performance of the underlying markets contributed €24.8 bn to the growth in the assets under management.

Graph 1: Assets Under Management in the European Fund Industry by Product Type (Euro Billions), December 31, 2017

European Fund Market Review 2017

Source: Lipper

With regard to the overall number of funds, it was not surprising that equity funds (€3.9 tr) were the asset type with the highest assets under management, followed by bond funds (€2.6 tr), mixed-asset products (€1.7 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 (€0.04 tr).

Graph 2: Market Share by Asset Type, December 31, 2017

European Fund Market Review 2017

Source: Lipper

European Fund Flow Trends, 2017

Generally speaking, the year 2017 was a year that marked a new record of net inflows (+€756.9 bn) into mutual funds. These flows were far above the record inflows of the years 2014 (+€351.0 bn) and 2016 (+€312.0 bn). The number for 2017 was also far above the long-term average of €158.4 bn. With regard to these numbers, it was not surprising that 2017 was also a good year for the promoters of ETFs; ETFs contributed €94.7 bn to the net inflows.

Graph 3: Estimated Net Flows in the European Mutual Fund Industry (Euro Billions)

European Fund Market Review 2017

Source: Lipper

Fund Flows Into Long-Term Mutual Funds

A more detailed view by asset type reveals that not all asset types did well in 2017. With regard to the low-interest-rate environment, it was surprising that bond funds (+€289.4 bn) were again the best selling asset type, followed by mixed-asset funds (+€172.8 bn), equity funds (+€172.1 bn), and alternative UCITS products (+€53.7 bn) as well as real estate funds (+€7.0 bn), and commodity funds (+€4.3 bn), while “other” products (-€2.5 bn) posted the second year in a row of net outflows. These fund flows added up to overall net inflows of €696.7 bn into long-term investment funds for the year 2017. These flows may indicate that the risk appetite of European investors increased, since equity funds—the asset type with the highest net outflows for 2016—were back on the menu. These flows may also indicate that European investors gained a deeper understanding of the performance drivers of mixed-asset funds and alternative UCITS funds, since they were rather shy of investing in these asset types in 2016.

The European ETF segment showed slightly different dynamics with regard to net inflows; equity ETFs posted the highest net inflows (+€63.3 bn) for the year 2017, followed by bond ETFs (+€26.9 bn). These flows indicated that European investors seem to have had a preference for equity funds when it came to passive products. This preference might have been driven by the fact that the bond segment in the European ETF market was much smaller and therefore showed lower liquidity as well as an overall lower number of products and strategies. This may be subject to change over the next few years.

Graph 4: Estimated Net Sales by Asset and Product Type, 2017 (Euro Billions)

European Fund Market Review 2017

Source: Lipper

Fund Flows Into Money Market Products

The net inflows into money market products (+€60.2 bn) for 2017 were roughly half as high as over the course of 2016 (+€110.7 bn). Mutual funds investing in money market instruments enjoyed net inflows of €59.7 bn, while their passive peers (ETFs) enjoyed only slight net inflows (+€0.4 bn).

This flow pattern led the overall fund flows to mutual funds in Europe to net inflows of € bn for the year 2017.

Money Market Products by Sector

Money Market GBP (+€35.0 bn) followed by Money Market USD (+€19.4 bn) and Money Market EUR (+€5.9 bn) were the three best selling sectors overall for the year 2017. At the other end of the spectrum Money Market Global (-€1.6 bn) suffered the highest net outflows in the money market segment, bettered somewhat by Money Market SEK (-€0.6 bn) and Money Market AUD (-€0.1 bn).

Fund Flows by Sectors

Equity Global (+€62.4 bn) was the best selling sector within the segment of long-term mutual funds, followed by Bond Global (+€50.9 bn), Bond Global USD Hedged (+€45.6 bn), and Bond EUR Short Term (+€40.3 bn) as well as Bond Emerging Markets Global in Hard Currencies (+€35.3 bn).

Graph 5: The Ten Best and Worst Selling Sectors for 2017 (Euro Billions)

European Fund Market Review 2017

Source: Lipper

At the other end of the spectrum Target Maturity Bond EUR 2020+ (-€8.4 bn) suffered the highest net outflows from long-term mutual funds, bettered by Bond USD High Yield (-€6.9 bn) and Absolute Return EUR Medium Term (-€6.6 bn) as well as Bond EMU Government (-€4.7 bn) and Guaranteed products (-€4.7 bn).

Assets Under Management by Promoters

A closer look at the assets under management in the European mutual fund industry shows that BlackRock (€755.9 bn) was by far the largest fund promoter in Europe, followed by Amundi (€401.4 bn) and JP Morgan (€321.5 bn) as well as Deutsche Bank (€286.8 bn) and UBS (€283.8 bn). Looking at these numbers, one needs to take into account that JP Morgan was the only fund promoter of the five leading fund promoters in Europe to recently start to offer ETFs. In addition, it is noteworthy that the jump in assets under management for Amundi was caused by the completion of the acquisition of Pioneer Investments; the assets of Pioneer are now counted under Amundi.

Graph 6: The 20 Largest Promoters by Assets Under Management in Europe, 2017 (Euro Billions)

European Fund Market Review 2017

Source: Lipper

Fund Flows by Promoters

BlackRock, with net sales of €101.1 bn, was the best selling fund promoter for the year 2017 overall, well ahead of Pimco (+€55.8 bn) and Amundi (+€47.5 bn). Even if one takes into account that the flows into BlackRock contained €34.6 bn from their ETF branch iShares, the traditional mutual funds branch of the business saw net inflows of €66.5 bn, making BlackRock still the best selling fund promoter in Europe. Contrary to this, the flows for Deutsche Bank. (+€16.6 bn) were mainly driven by inflows into their ETFs (+€11.2 bn). This meant Deutsche Bank would fall off the table of the 20 best selling fund promoters in Europe without their ETF business. From my point of view these numbers show how important the ETF business has become for European fund promoters. It is therefore no surprise that a number of active fund managers have announced they will launch ETFs in 2018 and beyond—a quite substantial structural change within the European fund industry.

Graph 7: Twenty Best Selling Promoters, 2017 (Euro Billions)

European Fund Market Review 2017

Source: Lipper

Considering the single-asset bases, Pimco (+€53.9 bn) was the best selling promoter of bond funds for 2017, followed by BlackRock (+€32.2 bn), Amundi (+€14.7 bn), and Eurizon Capital (+€12.6 bn) as well as UBS (+€10.9 bn).

Within the equity space BlackRock (+€56.8 bn) stood at the head of the table, followed by Amundi (+€13.2 bn), Vanguard Group (+€10.9 bn), and Deutsche Bank (+€10.0 bn) as well as Societe Generale (+€6.3 bn).

Eurizon Capital (+€14.7 bn) was the leading promoter of mixed-asset funds in Europe for 2017, followed by Allianz (+€9.4 bn), Amundi (+€9.3 bn), and BBVA (+€8.9 bn) as well as JP Morgan (+€8.6 bn).

GAM (+€7.8 bn) was the leading promoter of alternatives funds for the year, followed by Invesco (+€5.9 bn), Aviva (+€5.0 bn), and Old Mutual (+€3.9 bn) as well as BMO (+€3.5 bn).

Promoter Activity–Fund Launches, Liquidations, and Mergers

Despite the fact that 2017 was a record year with regard to the net flows into mutual funds and the overall assets under management in the European fund industry, promoter activity concerning fund launches, liquidations, and mergers rather indicated a consolidation. This was not a new trend in Europe, since the number of funds declined for 2017 for a seventh consecutive year. 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 in 2017 with regard to fund launches and liquidations was in line with the activity over the years 2014, 2015, and 2016, while the numbers of fund mergers, liquidations, and launches were below the numbers for the previous years. Since implementation of new regulations, currently MiFID II, increases the cost of maintaining a fund, we expect the trend of mergers and liquidations of small funds will continue in 2018.

Graph 8: Fund Launches, Liquidations, and Mergers

European Fund Market Review 2017

Source: Lipper

European fund promoters liquidated 1,197 funds over the course of 2017, while 861 funds were merged into other funds. In contrast, the fund promoters launched 1,961 funds. This meant the European fund market declined by 97 funds over the course of 2017, the lowest decline by number of funds over the past five years.

A more detailed view shows that bond funds had the highest number of mergers (280), while equity funds had the highest number of liquidations (374). On the other hand, mixed-asset funds showed the highest number of fund launches (743). With regard to the broader trends in the financial markets, it was not surprising that bond funds—despite the high net inflows over the last few years—showed the highest number of fund mergers and also a high number of liquidations. Investors appeared to be looking for new fixed income products that will either invest in higher-yielding segments, i.e., emerging markets, or have an unconstrained investment approach. Investors may therefore switch from “old” products into funds with an investment approach that better suits their goals.

It was also not surprising that in 2017 mixed-asset products were the only segment with a net growth in the number of products available to investors in Europe; these products showed the highest number of fund launches. This may have been because the fund industry reacts to investor behavior, and mixed-asset products have shown in general high net inflows. Another driver for the fund launches in the mixed-asset segment might be the fact that investors are looking for alternatives to bond products, since the U.S. Federal Reserve started to raise interest rates in 2016, meaning in turn that investors may have lost money if they were still invested in long-only bond products, once the cycle of rate hikes started 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, the so-called multi-asset funds. This helped streamline the product ranges and generate assets under management for the successor funds.

Graph 9: Fund Launches, Liquidations, and Mergers in 2017 by Asset Type

European Fund Market Review 2017

Source: Lipper

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