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November 27, 2023

Monday Morning Memo: European Fund Flow Trends Report, October 2023

by Detlef Glow.

The European fund industry witnessed overall outflows over the course of October 2023. These outflows occurred in a further unstable market environment in which some asset classes nevertheless showed positive results while others performed negatively. That said, especially equity indices faced a drawback over the course of the month, which contributed to the overall cautious sentiment of European investors. More generally, the market sentiment in October was also driven by hopes that central banks—especially the U.S. Federal Reserve—may have reached the last phase of its fight against high and further increasing inflation rates and may, therefore, start to keep interest rates at least stable quite soon. Some investors already think there might be room for decreasing interest rates later this year, which might be reflected by the estimated inflows in bond ETFs.

Nevertheless, these estimates are under scrutiny since the Fed seems to be further in a hawkish mode, as the rate outlook still includes potentially an additional rate hike this year and fewer rate cuts in 2024. Also, there are still some concerns about geopolitical tensions and the continuing normalization of disrupted delivery chains, as well as the continued possibility of recession in the U.S. and other major economies around the globe. These fears are raised by inverted yield curves, which are seen as an early indicator for a possible recession.

That said, the outflows did not occur in all market segments. The promoters of mutual funds faced outflows (-€19.0 bn), while the promoters of ETFs in Europe (+€15.2 bn) enjoyed inflows over the course of the month. The outflows for actively managed funds occurred in all asset types except for money market products. The main drivers for the outflows were, as in September, equity, and mixed-assets products. Within the current market environment, it is not surprising that European investors bought further into money market products since the Eurozone and other major economies have an inverted yield curve. This means that money market products offer a higher yield than medium or long-term bonds. More generally, long-term funds (-€45.0 bn) faced outflows, while money market products (+€41.3 bn) enjoyed inflows for the month. These flow numbers might indicate that European investors are further readjusting their portfolios to the current market environment.

 

Asset Type Flows

Asset Type Flows October 2023

In more detail, money market funds (+€41.3 bn) were the best-selling asset type overall for October 2023. The category was followed by real estate funds (+€1.2 bn). On the other hand, and commodities funds (-€0.1 bn), “other” funds (-€0.2 bn), bond funds (-€2.4 bn), alternatives funds (-€4.7 bn), mixed-assets funds (-€19.4 bn), and equity funds (-€19.5 bn) faced outflows.

Graph 1: Estimated Net Flows by Asset and Product Type – October 2023 (in bn EUR)

Monday Morning Memo, Review of the European Fund Industry, October 2023

Source: LSEG Lipper

 

Asset Type Flows Year to Date

The flow pattern for October drove the estimated overall net flows down to €58.7 bn year to date.

While mutual funds (-€61.0 bn) faced estimated net outflows, ETFs enjoyed inflows of €119.7 bn over the course of the first 10 months of 2023. The inflows into ETFs within the still somewhat uncertain market environment repeat a trend we saw over other periods with uncertain or rough market conditions. These periods include the financial crisis, the euro crisis, and the second half of 2018—where ETFs enjoyed inflows while mutual funds faced massive outflows.

Despite the inverted yield curve for the Eurozone and other major economies in the world, European investors preferred bonds over the first 10 months of the year, which might be seen as a sign that European investors may anticipate a possible ending of the interest hiking cycle of central banks around the globe led by the U.S. Federal Reserve.

Overall, long-term investment products (-€27.2 bn) faced outflows, while money market funds (+€85.8 bn) enjoyed inflows for the year so far.

Taking a closer look, bond funds (+€110.5 bn) were the asset type with the highest estimated net inflows overall for 2023 to date. It is followed by money market funds (+€85.8 bn), real estate funds (+€1.7 bn), and “other” funds (+€1.0 bn). On the other hand, commodities funds (-€2.5 bn), equity funds (-€18.9 bn), alternative UCITS funds (-€25.2 bn), and mixed-assets funds (-€93.6 bn) faced outflows for the year to date.

Graph 2: Estimated Net Sales by Asset and Product Type, January 1 – October 31, 2023 (Euro Billions)

Monday Morning Memo, Review of the European Fund Industry, October 2023

Source: LSEG Lipper

 

Fund Flows Active vs Passive Products

The trend toward passive investment vehicles is widely discussed by market observers and asset managers, so it is worthwhile to highlight this topic, especially as not all passive products are ETFs. In fact, the flows into ETFs (+€119.7 bn) were outpacing the flows into passively managed index mutual funds (+€30.8 bn) for the first 10 months of 2023.

Graph 3: Estimated Net Flows by Management Approach and Product Type (January 1 – October 31, 2023)

Monday Morning Memo, Review of the European Fund Industry, October 2023

Source: LSEG Lipper

More generally, the trend toward passive products continued in Europe. Passive products (ETFs and index-tracking mutual funds) have enjoyed inflows (+€150.5 bn) over the course of 2023 so far, while actively managed mutual funds faced outflows (+€91.9 bn).

In more detail, ETFs have witnessed inflows of €119.7 bn over the course of the first 10 months of 2023. These flows are already well above the level of the full year flows for 2019 (+€106.7 bn). Even as the record inflows of the year 2021 (+€161.4 bn) seem to be somewhat out of reach, 2023 will be considered as a very strong year for the European ETF industry.

Conversely, actively managed long-term mutual funds faced outflows (-€169.3 bn). That said, the inflows into money market products (+€77.4 bn) brought the overall outflows from actively managed funds down (-€91.9 bn).

Some market observers may speculate that European investors are selling actively managed products and buying back passive products. Generally speaking, one could agree with this thesis by looking at the high-level numbers, but as this can’t be proven by facts, I would not totally agree with this assumption.

In addition, one needs to bear in mind that the flows in money market products are impacted by a combination of asset allocation decisions of portfolio managers and corporate actions such as cash dividends or cash payments since money market funds are also used by corporations as replacements for cash accounts.

 

Fund Flows by Lipper Global Classifications

Fund Flows by Lipper Global Classifications, October 2023

Given the unstable economic outlooks and the inverted yield curves, it was not surprising that Money Markey EUR (+€30.1 bn) dominated the table of the 10 best-selling peer groups by estimated net flows for October. It was followed by Money Market USD (+€6.7 bn), Target Maturity Bond 2020+ (+€5.8 bn), Money Market GBP (+€4.4 bn), and Equity US (+€3.3 bn).

Graph 4: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, October 2023 (Euro Millions)

Source: LSEG Lipper

On the other side of the table, Mixed Asset EUR Flexible – Global (-€4.2 bn) faced the highest estimated net outflows for October, bettered by Mixed Asset EUR Balanced – Global (-€4.0 bn) and Equity Emerging Markets Global (-€3.7 bn).

A closer look at the best- and worst-selling Lipper Global Classifications for October shows that European investors were somewhat in mixed mode with regard to their risk appetite over the course of the month. On one hand, European investors increased their positions in money market and bond classifications mainly in EUR and USD, as well as their equity exposure in some regions. On the other hand, they reduced their exposure to global/regional/single emerging markets equity products, as well as to mixed asset products (mainly in EUR) since these products may have been used to generate yield and income over the low interest rates period.

 

Fund Flows by Lipper Global Classifications, Year to Date

A closer look at the best- and worst-selling Lipper Global Classifications for the first 10 months of 2023 shows that European investors are somewhat in a mixed mode with regard to their risk appetite since money market products dominated the table of the best-selling Lipper Global Classifications.

As graph 2 shows, mixed-assets products faced the highest outflows over the course of the year 2023 so far, while bond products enjoyed the highest inflows. Given the overall trend it was not surprising that the table of the best-selling Lipper Global Classifications year to date is dominated by bond and money market classifications.

Money Market USD (+€68.5 bn) was the best-selling peer group for the year so far. It was followed by Money Market EUR (+€58.5 bn), Target Maturity 2020+ (+€47.2 bn), Equity Global (+€32.0 bn), and Bond Global USD (+€17.0 bn).

Graph 5: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – October 31, 2023 (Euro Billions)

Monday Morning Memo, Review of the European Fund Industry, October 2023

Source: LSEG Lipper

Given the current market environment it was not surprising to see so many mixed-assets classifications on the opposite side of the table since European investors seem to be readjusting their portfolios to the new market environment. Money Market GBP (-€57.2 bn) faced the highest outflows for the year so far. It was bettered by Mixed Asset EUR Conservative – Global (-€22.2 bn), Mixed Asset GBP Balanced (-€21.6 bn), Mixed Asset EUR Flexible – Global (-€19.8 bn), and Mixed Asset EUR Balanced – Global (-€16.2 bn).

As mentioned above, it is noteworthy that the estimated flows in money market sectors are not only a reflection of asset allocation decisions of investors since these products are also used by corporates as a replacement for cash accounts. In addition, one needs to bear in mind that the outflows from Money Market GBP are the aftermath of the LDI crisis. It is also important to recall that the yield curves in the Eurozone and other parts of the world are currently inverted, which means that money market instruments offer a higher yield than medium- or long-term bonds.

 

Fund Flows by Promoters

Fund Flows by Promoters, October 2023

JPMorgan (+€7.1 bn) was the best-selling fund promoter in Europe for October, ahead of BlackRock (+€7.0 bn), HSBC (+€5.3 bn), Amundi (+€4.5 bn), and DWS (+€4.0 bn). Given the product ranges of the 10-top promoters and the overall fund flow trends, it was not surprising to see that ETFs played only a major role for the positions of BlackRock and DWS.

Graph 6: Ten Best-Selling Fund Promoters in Europe, October 2023 (Euro Millions)

Source: LSEG Lipper

 

Fund Flows by Promoters, Year to Date

The largest fund promoter in Europe, BlackRock, (+€64.4 bn) is also the best-selling fund promoter in Europe over the course of the year so far, ahead of JPMorgan (+€23.8 bn), HSBC (+€22.1 bn), Vanguard (+€21.9 bn), and LGT Group (+€15.2 bn). As for the monthly flows, it was not surprising to see that ETFs played a major role for the inflows and the respective league table positions of BlackRock and DWS.

By looking at these numbers, one needs to bear in mind that the flows in the money market segment over the course of 2023 so far have a significant impact on the flow numbers and positions in the league table of the best-selling fund promoters in Europe.

Graph 7: Ten Best-Selling Fund Promoters in Europe, January 1 – October 31, 2023 (Euro Billions)

Monday Morning Memo, Review of the European Fund Industry, October 2023

Source: LSEG Lipper

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