June 3, 2019

Monday Morning Memo: Is the European Investment Industry in a Crisis?

by Detlef Glow.

A look at the fund flows in Europe for the year 2019 so far (-€73.0 bn) reveals that the European fund industry faces another difficult year. In more detail, April 2019 marked the twelfth consecutive month with outflows from long-term mutual funds. In aggregate, these outflows were so high that 2018 came in as the year with the highest outflows from mutual funds (-€129.2 bn) since after the financial crisis in 2008. The outflows in 2019 are already on the same level as the outflows during the euro crisis in 2011 (-€76.0 bn). That said, everybody knows that the outflows during the first four months of 2019 could be offset by strong inflows for the rest of the year so that 2019 may end up with overall inflows.

The outflows in 2019 so far might not impact the overall balance sheet of the European asset management industry since the upwards trend on the markets could lead to overall increasing assets under management and, therefore, to a higher income, as the fees of the asset managers are based on the assets under management. (Read more about the development of the assets under management in our review of the European fund industry in Q1 2019)

Nevertheless, the current environment should be seen as threatening for the promoters of actively managed funds in Europe.

Graph 1: European Fund Flows (in bn euro)*

Comment on European Fund Flows

Source: Lipper from Refinitiv

A more detailed analysis shows that 2019 does already show higher outflows than mutual funds experienced in 2011, as the overall numbers also contain ETF flows—which were positive in both years. Since the inflows in ETFs were stronger (+€30.9 bn) in the first four months of 2019 than over the full year of 2011 (+€16.7 bn), the overall outflows from mutual funds year to date (-€103.9 bn) already topped the overall outflows from mutual funds in 2011 (-€92.8 bn).

With regard to this, it can be said that investors in Europe act like they are in a crisis mode by buying transparent investment vehicles which they can sell immediately if needed. Given the broader economic picture, this behaviour seems to be rational, as there are signs of a global slowdown in economic growth and concerns about a possible trade war between the U.S. and China. Additionally for Europe, the prolonged Brexit process and fears around the geopolitical situation in the Middle East darken the economic picture.

Graph 2: European Fund Flows by Product (in bn euro)*

Comment on European Fund Flows

Source: Lipper from Refinitiv

In addition to the market environment-related flows out of mutual funds, the ongoing discussions about high management fees fuel the general trend toward passive investment vehicles because they are considered as cheap and efficient tools to implement asset allocation views within a portfolio.

Graph 3 depicts that the flows in the classic asset types (bonds and equities) in 2019 are dominated by ETFs. Especially within the bond segment this comes as a surprise, as one would consider an actively managed fund as the investment vehicle of choice within a low interest rate environment. Instead, it seems like European investors do their own asset allocation and favor straightforward investments in bond markets or specific market segments.

Graph 3: European Fund Flows 2019 (YtD) by Asset Type (in bn euro)*

Comment on European Fund Flows

Source: Lipper from Refinitiv

It should also be concerning for the European fund industry that mixed-asset and alternative UCITS products obviously fell out of favor, as a number of these products did not deliver on investor expectations. These products were sort of magnets with regard to inflows over the past few years, but after disappointing results of some hyped funds during the rough market periods in 2016 as well as in Q4 2018, investors moved out of the respective products.

Within our market comments, we always claimed that a possible loss of trust can be a trigger for massive outflows from a single asset manager or—even worse—from the whole market segment, which would lead to a massive hit on the revenues of the respective fund promoter.

With regard to the above, it can be concluded that the European mutual fund industry is not in a crisis yet. That said, the overall industry is not set to grow either, as the discussion around high fees and average performance results will further impact the flows into actively managed funds. This means that the European asset management industry has to do its homework, as this will be the only way to win back and keep the trust of investors in the value added by actively managed funds. In other words, I strongly believe that those asset managers who don’t do their homework will face eroding assets under management while others, especially passive investment products, will enjoy healthy inflows and prosper even in rough market conditions.

*2019 YtD covers the period between December 31, 2018 and April 30, 2019

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

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