February 10, 2020

Monday Morning Memo: Review of Promoter Activity–Fund Launches, Liquidations, and Mergers in 2019

by Detlef Glow.

Last year, as stated in our latest fund market review, was a good year for net flows into mutual funds and the overall development of the assets under management in the European fund industry. As a result, you might expect that fund promoter activity concerning fund launches, liquidations, and mergers would show that the fund industry is in growth mode. However, there was only a slight increase in the number of funds in Europe—many French asset managers closed and merged funds domiciled in France with similar funds which they launched in Luxembourg and/or Ireland to support their cross-border fund sales activities.

Generally speaking, the increase in the number of funds available to European investors marks the second year of growth in the number of funds since Lipper began to study these developments in 2012.

There was a net growth in the number of funds even though the number of fund mergers and liquidations increased in 2019, though not at the same pace at which funds launched. The main reasons for the mergers and liquidations at the fund level were mergers of fund managers and restructurings of general product offerings. For example, some fund promoters merged funds with similar investment objectives to strengthen their product ranges. Lower profitability because of a lack of assets under management might have been another reason why fund promoters merged or liquidated some funds. At the top-line level, the level at which promoters launched and liquidated funds seemed to be somewhat in line with the activity over the other years covered in this report. Since the implementation of new regulations, currently MiFID II, increases the cost for maintaining a fund, we expect that the trend of consolidation of small funds will continue in 2020.

Graph 1: Fund Launches, Liquidations, and Mergers

Fund Mergers, Launches and Liquidations in the European fund industry 2019

Source: Refinitiv Lipper

European fund promoters liquidated 1,287 funds over the course of 2019, while 1,105 funds were merged into other funds. In contrast, European fund promoters launched 2,534 funds. This meant the European fund market increased by 142 funds over the course of 2019.

A more detailed view shows that equity funds had the highest number of mergers (347), liquidations (3,351), and fund launches (786). Regarding the broader trends in financial markets, it was surprising equity funds had the highest number of fund mergers, liquidations, and launches in the current market environment.

It was, however, not surprising that mixed-asset products showed the highest net growth in the number of products available to investors in Europe. The fund industry reacts to investor behavior and mixed-asset products have experienced years of high net flows. Another driver for fund launches in the mixed-assets segment might be the fact that investors are looking for alternatives to bond products, as there are some uncertainties for different types of bonds ahead. 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 (270) or merged (214) these products into their new product offerings (290), the so-called multi-assets funds, since this helped to streamline the product ranges and generate assets under management for their successor funds. This makes the respective funds more attractive to professional investors.

Graph 2: Fund Launches, Liquidations, and Mergers in 2019 by Asset Type

Fund Mergers, Launches and Liquidations in the European fund industry 2019

Source: Refinitiv Lipper

Since equity global was one of the best-selling Lipper Global Classifications over the past few years and contains a high number of funds, it is not surprising that we witnessed a lot of promoter activity around fund launches, closures, and mergers within this peer group. The same is somewhat true for mixed-asset products, even as the demand for these products decreased in 2019 from the high demand of prior years. To rekindle interest in these funds, promoters might want to launch new products using advanced portfolio management techniques. That said, the high number of fund launches of mixed-asset products in the target maturity segment is driven by the closures of funds that reached their maturity in 2019 (please see chart 4 for more information) and the ongoing demand for products that match the maturity and respective risk profile of investors.

We also see a lot of activity in classifications which were very popular with investors in 2019, so it looks like fund promoters are seeking to profit from current trends in investor behavior.

Graph 3: Lipper Global Classifications with at Least 10 Net New Products

Fund Mergers, Launches and Liquidations in the European fund industry 2019

Source: Refinitiv Lipper

A more detailed view of the Lipper Global classifications in which a net of 10 or more funds were closed shows there was also a lot of activity in the mixed-assets segment. As this activity was in the already more advanced segments—the so-called multi-asset funds—the activity might have been driven by a combination of the performance and the respective assets under management. Funds which don’t deliver a superior performance and face a lack of assets under management get closed since these funds may even not pass the selection criteria of fund selectors and gatekeepers in the future. Therefore, fund promoters tend to close the respective funds and start new funds with a somewhat similar investment objective. The same rationale might be true for alternative UCITS funds.

Another interesting point on the chart below regards activity around protected funds. One reason for the closure of these funds might be because some of them were hit by the falling equity markets at the end of 2018 and had no risk budget left to get back into equities in 2019. Another reason might be that in the current bull market—which has gone on for more than 10 years now—investors think that they don’t need protected funds anymore and pulled their money out. If this is the case, it would be bad news for all investors, since this kind of behavior normally happens shortly before the peak of the markets—and right before the beginning of a bear market—resulting in investors getting whipsawed.

Graph 4: Lipper Global Classifications with at Least 10 Net Product Closures

Fund Mergers, Launches and Liquidations in the European fund industry 2019

Source: Refinitiv Lipper

I hope that my above conclusion about investor behavior is wrong so that all investors can further enjoy the returns from increasing markets.

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

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