REUTERS/Athar Hussain
The generally positive environment in the financial markets and the demand for return have directed investors into mutual funds. In fact, the European mutual fund industry enjoyed record inflows during 2013 and 2014 and even into first quarter 2015. Such a positive market environment and high net inflows into mutual funds have in the past often led to a boom in new fund launches in the various market segments.
I am thinking here about the tsunami of new technology funds launched during the tech bubble, followed by the boom of 130/30 funds as well as a bit later by absolute return products. All these product trends led to disappointments on the part of investors, since the products didn’t deliver what was promised by marketing or sales departments of the fund promoters.
As a result fund promoters had to clean up their product ranges by closing or merging funds whose assets under management had become insignificant or which had a bad track record and could not be expected to be sold for a number of years, if at any time.
Since fund flows during the years 2013 and 2014 as well as over the first three months of 2015 have been dominated by those to asset allocation/multi-asset products, one would expect–remembering the behavior of the past—that fund promoters will try to capture this trend by launching a large number of mutual funds with a particular investment objective. That said, we have witnessed a number of fund launches within the multi-asset space but not as many as, for example, for tech funds during the tech bubble. In addition, it is noteworthy that on a market level these launches have not increased the number of funds, since even the mixed-asset segment has shown a decreasing number of funds.
From my point of view it is a good sign that the record inflows into mutual funds, especially within the mixed- and multi-asset segment, have not led to the immediate launch of a high number of new products. That said, the overall number of funds does not tell the full story. A more detailed view shows that a number of asset managers have launched multi-asset products, since these funds are ”en vogue,” meaning the industry is riding the multi-asset wave, but they have—opposite to the past—not rushed to bring products to market. Since the management of multi-asset products is far more complex than the management of “plain-vanilla” funds, the question that arises from this is: Are all these managers really experts in multi-asset products, or will this story end like the examples given above?
In addition, there is other factor that might raise concerns: the European asset management industry has been—since the financial crisis of 2008 and the still-ongoing euro-debt crisis of 2011—in a consolidation mode at the promoter level, meaning that mergers and acquisitions within the industry could lead to a lower number of fund promoters. The fastest way to profit from synergies or to achieve economies of scale is to clean up the merged product ranges in terms of eliminating duplicates; this–and not the reluctance of fund promoters—can be seen as the main factor of why the mixed-asset segment has decreased in terms of the number of available products.
In this regard, I would conclude that the European fund management industry has at least partly learned lessons from the past, but it still needs to do some homework. From my point of view it seems fund promoters have made educated decisions when they launch new products, rather than flooding the market with new products to profit from a rising trend. In addition, a number of asset managers have built up special departments to manage these portfolios. For good or bad, these efforts might be seen as proof the European asset management industry has learned lessons from the past. The unfinished homework that needs to be done with regard to in-house infrastructure (people, process, and systems) is to achieve the promised and therefore expected returns to avoid investor disappointment.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.
