February 4, 2019

Monday Morning Memo: Review 2018-Rough Markets took their Toll on the European Fund Industry

by Detlef Glow.

The European fund industry faced estimated net outflows of €129.2 bn in 2018 after six consecutive years with net inflows. The flows were mainly driven by the discussions about a possible trade war between the USA and China, as well as a possible return of the Euro crisis caused by developments in Italy and France, and an environment of rising interest rates in the USA. With regard to this, it was not surprising that 2018 wasn’t another record year for the European fund industry. That said, even as the general environment was negative, some fund promoter could still enjoyed significant inflows. It was also not surprising the European fund industry experienced further mergers and acquisitions on the asset manager side, as well as in the service provider segment.

Assets Under Management in the European Fund Industry

The assets under management in the European fund industry decreased from €10.4 tr to €9.9 tr over the course of the year 2018. This decrease was mainly driven by the performance of the underlying markets (-€417.3 bn), while net sales contributed outflows of €129.2 bn.

Since exchange-traded funds (ETFs) have become an important part of the European fund industry, it is essential to review that market segment separately to get a better picture of the underlying trends in the market, although the numbers for ETFs are included in the overall numbers of the European fund industry.

The European ETF industry enjoyed in 2018 a further increasing popularity with all kinds of investors. This popularity was seen in the form of net sales (+€42.2 bn), while assets under management decreased from €656.8 bn at the end of December 2017 to €633.1 bn at the end of 2018 due to the negative impact from the underlying markets (-€65.8 bn).

Graph 1: Assets Under Management in the European Fund Industry by Product Type (Euro Billions)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

With regard to the overall number of funds, it was not surprising that equity funds (€3.5 tr) were the asset type with the highest assets under management, followed by bond funds (€2.5 tr), mixed-asset products (€1.7 tr), money market funds (€1.2 tr), alternative UCITS funds (€0.6 tr), real estate funds (€0.2 tr), “other” products (€0.2 tr), and commodity funds (€0.04 tr).

Graph 2: Market Share by Asset Type (December 31, 2018)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

European Fund Flow Trends 2018

Generally speaking, the year 2018 was a tough year for the European fund management industry since the outflows from mutual funds (-€129.2 bn) were at their highest level since the financial crisis in 2008. That said, it seems to be a bit surprising that 2018 was still a good year for the promoters of ETFs, as ETFs enjoyed inflows of €42.2 bn. But upon further review this pattern seems to be rather normal, since ETFs also experienced inflows during the financial crisis in 2008 (+€52.8 bn) and the Euro crisis in 2011 (+€16.7 bn).

Graph 3: Estimated Net Flows in the European Mutual Fund Industry (Euro Billions)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

Fund Flows Into Long-Term Mutual Funds

A more detailed view by asset type unveils that not all asset types had outflows in 2018. Mixed-asset funds (+€12.9 bn) was the best-selling asset type, followed by “other” funds (+€7.8 bn), real estate funds (+€6.8 bn), and commodity funds (+€2.4 bn). With regard to the changing interest-rate environment, it was not surprising that bond funds (€109.2 bn) was the asset type with the highest outflows, bettered by alternative UCITS products (-€33.0 bn) and equity funds (-€16.9 bn). These fund flows added up to overall net outflows of €129.3 bn into long-term investment funds for the year 2018. These flows may indicate that European investors decreased the risk in their portfolios by selling bonds, alternatives, and equities. On the other hand, they bought into rather conservative products that may helped them to diversify their portfolios even further.

The European ETF segment showed different dynamics with regard to net inflows, since equity ETFs posted the highest net inflows (+€27.5 bn) for the year 2018, followed by bond ETFs (+€14.6 bn), money market ETFs (+€1.3 bn), mixed-asset ETFs (+€0.4 bn), and alternative UCITS ETFs (+€0.04 bn), while commodity ETFs (-€0.3 bn) and “other” ETFs (-€1.3 bn) faced outflows. These flows may indicate that European investors have a preference for the product features of ETFs (transparency and liquidity) when investing in bonds and equities during uncertain market conditions.

Graph 4: Estimated Net Sales by Asset Type, 2018 (Euro Billions)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

Fund Flows into Money Market Products

As European investors sold long-term mutual funds, a switch into money market funds would have been a logical step, as these products are considered so-called safe haven products. That said, it was surprising that the net inflows into money market products (+€0.1 bn) in 2018 were rather shy.

This flow pattern led the overall fund flows to mutual funds in Europe to net outflows of €129.2 bn for the year 2018.

Money Market Products by Sector

Money Market USD (+€13.8 bn), followed by Money Market Global (+€3.4 bn) and Money Market SEK (+€2.5 bn) were the three best-selling money market sectors for the year 2018. At the other end of the spectrum, Money Market GBP (-€12.2 bn) suffered the highest net outflows in the money market segment, bettered somewhat by Money Market EUR (-€8.6 bn) and Money Market EUR Leveraged (-€2.3 bn).

Fund Flows by Sectors

Equity Global (+€26.5 bn) was again the best-selling sector within the segment of long-term mutual funds, followed by Unclassified Products (+€16.7 bn), Equity US (+€12.7 bn), Mixed-Asset USD Balanced – US (+€11.8 bn), and Bond USD Medium Term (+€7.5 bn).

Graph 5: The Ten Best and Worst Selling Sectors for 2018 (Euro Billions)

European Fund Industry Review 2018 

Source: Lipper at Refinitiv

At the other end of the spectrum, Bond EUR Corporates (-€21.008 bn) suffered the highest net outflows from long-term mutual funds, bettered by Bond USD High Yield (-€18.8 bn), Absolute Return EUR Medium (-€16.8 bn), Equity Europe (-€16.0 bn), and Bond Global High Yield (-€15.2 bn).

Assets Under Management by Promoters

A closer look at the assets under management in the European mutual fund industry shows that BlackRock (€735.7 bn) was by far the largest fund promoter in Europe, followed by Amundi (€331.7 bn), JP Morgan (€295.1 bn), UBS (€275.0 bn), and Deutsche Bank (€265.6 bn).

Graph 6: The 20 Largest Promoters by Assets Under Management in Europe, 2018 (Euro Billions)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

Fund Flows by Promoters

BlackRock, with net sales of €25.4 bn, was the best-selling fund promoter for the year 2018 overall, well ahead of Aviva (+€18.4 bn) and UBS (+€11.5 bn). Even if one takes into account that the flows from BlackRock contain €19.2 bn from their ETF branch iShares, the traditional mutual funds branch of the business saw net inflows of €6.3 bn, which would make BlackRock fall into eleventh place.

Graph 7: Twenty Best Selling Promoters, 2018 (Euro Billions)

European Fund Industry Review 2018

Source: Lipper at Refinitiv

Considering the single-asset bases, UBS (+€10.1 bn) was the best-selling promoter of bond funds for 2018, followed by Vanguard Group (+€5.3 bn), BlackRock (+€3.8 bn), Bank of America (+€3.0 bn), and Ashmore (+€2.9 bn).

Within the equity space, BlackRock (+€8.2 bn) stood at the head of the table, followed by Baillie Gifford (+€5.7 bn), Morgan Stanley (+€5.2 bn), Vanguard Group (+€4.2 bn), and State Street (+€3.9 bn).

Allianz (+€12.3 bn) was the leading promoter of mixed-asset funds in Europe for 2018, followed by Union Investment (+€5.6 bn), Eurizon Capital (+€5.0 bn), JP Morgan (+€3.7 bn), and Mercer (+€3.0 bn).

H2O Asset Management (+€9.3 bn) was the leading promoter of alternatives funds for the year, followed by BlackRock (+€2.0 bn), Merian Global Investors (+€1.6 bn), Blue Bay (+€1.3 bn), and Man Investments (+€1.2 bn).

Promoter Activity–Fund Launches, Liquidations, and Mergers

Despite the fact that 2018 was a tough year with regard to net flows into mutual funds and the overall assets under management in the European fund industry, the promoter activity with regard to fund launches, liquidations, and mergers indicated the industry is in a growth mode, as we witnessed an increasing number of funds in Europe for the first time since Lipper began to study these developments in 2012. More generally, the increasing number of funds was continuing a trend in Europe, since the rate of decline slowed down for the sixth consecutive year. The main reasons for the mergers and liquidations at the fund level were mergers of fund managers, as well as restructurings of the general product offerings; i.e., some fund promoters merged funds with a similar investment objective to strengthen their product ranges. Lower profitability because of the lack of assets under management might have been another reason fund promoters merged or liquidated some funds. At the top-line level, the activity of fund promoters with regard to fund launches and liquidations seemed to be in line with the activity over the years 2014, 2015, 2016, and 2017, but a more detailed view unveils that only the number of fund liquidations continued the trend and it was below the numbers for the previous years, while the number of fund mergers and launches increased over the course of 2018. Since the implementation of new regulations, currently MIFID II, does increase the cost for maintaining a fund, we expect that the trend with regard to mergers and liquidations of small funds will continue in 2019.

Graph 8: Fund Launches, Liquidations and Mergers

European Fund Industry Review 2018

Source: Lipper at Refinitiv

The European fund promoters liquidated 1,190 funds over the course of 2018, while 994 funds were merged into other funds. In contrast, European fund promoters launched 2,367 funds. This meant the European fund market increased by 183 funds over the course of 2018.

A more detailed view shows that equity funds showed the highest number of mergers (347), liquidations (3,351), and fund launches (786). With regard to the broader trends in the financial markets, it was surprising equity funds showed 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 as the fund industry reacts to investor behavior and mixed-asset products have experienced years of high net flows. Another driver for the fund launches in the mixed-asset 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-asset funds, since this helped to streamline the product ranges and generate assets under management for their successor funds.

Graph 9: Fund Launches, Liquidations and Mergers in 2018 by Asset Type

European Fund Industry Review 2018

Source: Lipper at Refinitiv

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