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March 14, 2016

Monday Morning Memo: The Rise of Alternatives Funds in the European Fund Industry

by Detlef Glow.

With estimated net sales of €386.0 billion, the year 2015 was not only a very good year for the overall European fund management industry, it was also a tremendous year for mixed-asset funds (+€95.4 billion net). This asset type was in 2015—for the first time since Lipper has run this statistic—the best selling asset type overall.

Graph 1: Estimated Net Sales in Europe, 2015 (Euro Billions)

Fund Flows in Europe

Source: Lipper

But a closer look into the flows statistics shows another big surprise with regard to estimated net flows: alternative products (+€89.4 billion) were the second best asset type for the year and enjoyed their second highest estimated net inflows since 2004. The only year in the analyzed period that beat the estimated net flows of 2015 was 2013 when alternatives were able to gather €97.0 billion.

But since this asset type faced net outflows (-€0.04 billion) over the year 2014, some market observers might be asking why this kind of funds became so popular with European investors in 2015.

Graph 2: Estimated Net Sales in Europe, 2004 – 2015 (Euro Billions)

Fund Flows in Europe Alternatives vs. all other asset types

Source: Lipper

One of the reasons for the rise of alternative products is the fact that European investors, especially when they have to fulfill some needs with the income from their portfolio, are looking for new sources of return that (in the best case) are not correlated with the markets at all. By looking for these kinds of products, investors end up with their investments in the alternatives space. In addition, since alternatives funds (as long as they are under the UCITS label) have become regulated under the AIFM directive in Europe, it has become much easier to buy these products, especially for institutional investors.

Why did this asset type face net outflows for 2014?

Even though one could assume the general environment in 2014 was quite similar to that in 2015, there were some differences. In 2014 equities, in particular from those companies that pay high cash dividends, were still looking reasonably priced, and there was comparatively low volatility in the markets, making it easy for investors from a risk/return point of view to choose equities or mixed-asset products for their portfolios. In addition, a number of alternatives strategies need volatility to reach their target returns, and if there is only low volatility, it is likely these funds will miss their targets. This fact was also anticipated by investors and led to additional outflows from alternatives products.

But in 2015 the general environment changed. Equities didn’t look cheap at all, and investors anticipated a rise in volatility. As volatility rose during the market turmoil in December 2015, funds employing a volatility strategy started to perform well again.

In this regard 2016 might become a very good year for net flows into alternatives, since the industry has started to deliver on alternatives’ requirements. In addition, European investors have become more sophisticated and can differentiate between the different types of alternative strategies. They will therefore most likely buy into strategies that have been successful in the past.

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


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