View of the Mutual Fund Market in Europe
The chart below breaks down the European fund market by asset class as of the end of Q4 2015. Equity funds dominated the scene with a market share of 37% of the funds available for sale in Europe, followed by mixed-asset funds (27%), bond funds (21%), and money market funds (4%). The remaining 11% of “other” funds were real estate funds, commodity funds, guaranteed funds, and funds of hedge funds.
Figure 1 Market Share of Mutual Funds Registered for Sale in Europe by Asset Type as of the End of December 2015
Source: Lipper
Over the course of 2015, 2,162 funds were launched in Europe. The quantity of newly launched funds for 2015 was nearly flat compared with the number of launches for 2014 (2,218). Comparing industry activity in issuing new products over the last five years, we noticed for 2015 the lowest number of newly launched products. However, the negative trend slowed over the years.
The number of liquidations went down approximately 7%, comparing 2015 with 2014—from 1,699 to 1,573, the lowest number of liquidations in the five-year observation period.
During the same period the number of fund mergers was flat–1,127 for 2015, while we witnessed 1,122 for 2014.
Figure 2 Overview of New Fund Launches, Mergers, and Closures of Investment Funds, 2015
Source: Lipper
The trend of lower activity in setting up new funds since the peak in 2010 slowed; the European mutual fund industry launched only a slightly lower number of new products for 2015 compared to 2014. In parallel, the number of mergers stayed flat, while the number of liquidations went down. These numbers might be the result of a successful revision of fund ranges, combined with the regular consolidation efforts of fund promoters over the past few years.
In contrast, the record-high inflows into mutual funds that led to a new all-time high in assets under management at the end of 2015 might have eased profitability pressures for fund promoters and therefore slowed the overall consolidation process. This may mean that some fund liquidations or mergers, which might be seen as necessary for the profitability of the respective funds and the efficiency of the overall product range, were postponed and will take place in upcoming years.
Even though the number of newly launched funds further decreased over the course of 2015, it seemed there was a healthy demand for new products from investors.
Launches, Mergers, and Liquidations over the Past Five Years
With 563 newly launched products for Q4 2015, we noticed a higher number of newly issued products than in the previous quarter (+24%) and compared with the last quarter of 2014 (+19%). The launches for Q4 2015 showed the highest number of new products since Q4 2011. The number of liquidations went up significantly (+38%) compared with the preceding quarter but were in line with the number for Q4 2014 (-2%). Mergers also showed a lower number for this comparison between Q4 2015 and Q3 2015 (-20%) and were nearly flat, comparing Q4 2015 with Q4 2014 (-4%).
Figure 3 Launches, Mergers, and Closures of Investment Funds, Q4 2011-Q4 2015
Source: Lipper
The net size of the European fund universe decreased since Q4 2011. The net decrease of 141 products for Q4 2015 was in line with the net decrease we saw for Q2 2014. Both reflected the lowest net decrease in the five-year observation period.
Figure 4 Net Change in Number of Funds Registered for Sale in Europe, Q4 2011-Q4 2015
Source: Lipper
Changes in European Fund Universe Asset Classes, Q4 2015
Q4 2015 witnessed the launch of 563 funds: 190 equity funds, 119 bond funds, 181 mixed-asset funds, 69 “other” funds, and 4 money market funds. During the same period 444 funds were liquidated: 128 equity funds, 87 bond funds, 115 mixed-asset funds, 94 “other” funds, and 20 money market funds.
For Q4 2015, 260 funds were merged: 72 equity funds, 92 bond funds, 52 mixed-asset funds, 13 “other” funds, and 31 money market funds.
Figure 5 Overview of New Fund Launches, Mergers, and Closures, October 1, 2015-December 31, 2015
Source: Lipper
The net changes for Q4 2015 showed negative totals for all measured asset classes other than mixed-asset products, which counter-steered this trend (net +14 products).
The high activity with regard to fund launches in the mixed-asset sector might not be surprising, since this sector also contains multi-asset products, which have been in the favor of investors over the last two years; fund promoters appeared to want to participate in this trend by launching new products. That said, the high activity with regard to fund mergers and liquidations in this sector was surprising, since mixed-asset funds were the best selling products for 2015 and the second best selling product type for 2014. Fund promoters should be able to participate in the trend toward mixed-/multi-asset products with their existing funds, especially since these products have an existing track record, making it easier to market the product if the numbers are sufficient.
Also noticeable were the changes in money market products, where we saw a net decrease of 47 products in total. Considering the relatively low number of these products (1,220) listed in the European market, this change was a decrease of more than 4% in the number of instruments from this asset class.
Changes in European Fund Universe by Asset Type, 2015
During 2015 a total of 2,162 funds were launched in Europe: 760 equity funds, 461 bond funds, 701 mixed-asset funds, 205 “other” funds, and 35 money market funds. These numbers were in line with the market structure and the overall market trends with regard to fund flows; equity funds were the largest product category by number of funds as well as by assets under management, while mixed-asset funds were the best selling product category over the course of 2015.
Comparing the number of funds available for sale in the United States and Europe, as well as the average assets under management per fund, it seems there is still a huge potential for consolidation within the product ranges of European investors. This appears to be the case, even if one takes into account that the European market has, besides common regulations, a high number of local rules that need to be filled if a fund promoter wants to sell a fund in a given country. The reshaping of the product offerings can be seen in the number of fund liquidations and fund mergers over the course of 2015, when 1,573 funds were liquidated during the year. In more detail fund promoters in Europe closed 471 equity funds, 273 bond funds, 342 mixed-asset funds, 397 “other” funds, and 90 money market funds. As with product launches these numbers seem to represent the market structure and the demand from investors.
These conclusions are also valid with regard to the fund mergers in Europe during 2015 as shown by the number per asset type. Overall, fund promoters in Europe merged 1,127 funds. In detail, there were 384 equity funds, 353 bond funds, 259 mixed-asset funds, and 37 “other” funds as well as 94 money market funds merged into other products over the course of 2015.
Figure 6 Overview of New Fund Launches, Mergers, and Closures, December 31, 2014-December 31, 2015
Source: Lipper
The net changes for 2015 were in line with the changes reflected in the numbers for the last quarter of 2014. Other than mixed-asset funds (+100 products) all asset classes showed a net decrease in the number of products available to European investors. As mentioned, the net increase of products in the mixed-asset sector was in line with expectations from the net sales numbers over the course of 2015.
Again noticeable were the changes in the money market asset class, where we saw a net decrease of 149 products in total. Considering that 1,220 products were listed in the European market, that was a decrease of more than 12% of the instruments in this asset class.
Outlook
Since the European fund industry enjoyed high net inflows for 2015, it is surprising the industry was still cautious with regard to fund launches. There were a number of mergers between asset managers over the last few years, which led to a number of duplications in the respective product ranges that need to be cleared to achieve economies of scale. In addition, there was still a lot of pressure on asset managers with regard to profitability, which also drove the cleanup of the product ranges. This pressure might even increase, once the new regulatory frameworks are fully applied, since not all the costs related to regulation can be passed on to investors and will therefore become a burden on the asset management industry.
In this regard the consolidation of the European fund industry might continue over the foreseeable future, and even a supportive market environment—with rising equity and bond markets—might not stop the trend. But, the consolidation should at least slow, since increasing assets under management can lead to higher income for fund promoters.
We might also see an even higher pace of consolidation in the number of funds available to investors in Europe, if the volatility investors experienced in the markets during December 2015 and January 2016 continues over the course of 2016.
