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August 29, 2022

Monday Morning Memo: Which Trends are Driving the European Fund Industry?

by Detlef Glow.

The general economic outlook for the second half of 2022 and beyond is marked by geopolitical tensions in Europe and Asia, high inflation rates, increasing interest rates, and disrupted delivery chains. Rough market conditions are often linked to outflows from mutual funds and, therefore, it is not surprising that the European fund industry faced overall outflows for 2022 year to date.

If a fund promoter faces outflows, they often start to review their existing product ranges to close non-profitable funds or merge funds with similar investment objectives since this reduces costs and helps to keep profitability up. But fund promoters do not only close funds, they also launch funds that close gaps within their product range to offer their clients a one-stop-shop solution and to profit from new emerging trends. That said, it is somewhat surprising that the number of funds available to investors in Europe increased over the first half of 2022 within the current market environment.

A closer look at underlying flow trends shows that money market products had the highest outflows. This means that long-term mutual funds did relatively well within this market environment. Mixed-assets, equity, real estate, and “other” funds enjoyed inflows (Please refer to our fund market review for more details on the underlying flow trends).

A more detailed view of the flow numbers by asset type shows that ESG-related funds were enjoying high inflows. Given the high inflows over the years 2020 and 2021 and repurposing of conventional funds to ESG-related products aligned to article 8 and 9 of the Sustainable Finance Disclosure Regulation (SFDR) brought ESG-related investment strategies from niche to mainstream and the trend toward ESG-related products is expected to continue. This is because investors are increasingly aligning their portfolios with ESG-related targets. Therefore, it is not surprising that we witnessed a lot of activity regarding launches of ESG-related funds and mergers of existing products into these new products.

Another trend which is often discussed but has not materialized in the European fund industry yet are crypto assets and the underlying technologies such as distributed ledger technologies (DLT) and the respective supporting frameworks. This is not really surprising because many parts of the value chain of crypto assets were unregulated.

With the agreement on the Markets in Crypto Assets (MiCA) regulation, the EU Commission may have kicked off a new megatrend for investors because the new regulation set clear rules for a harmonized market that will provide legal certainty for crypto asset issuers, guarantee equal rights for service providers, and ensure high standards for consumers and investors. Despite the fact that crypto assets without an issuer, such as bitcoin, and non-fungible tokens (NFTs) are not part of the regulation, this regulation is seen as a landmark regulation which make crypto assets investable for wider parts of the investment industry. Therefore, it is to be expected that we will see a number of product launches in this area and perhaps high inflows into these products.

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

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