October 26, 2020

Monday Morning Memo: European Fund Industry Review—2020 Year to Date

by Detlef Glow.

The coronavirus pandemic hit the European fund industry with declining markets and estimated net outflows of €125.9 bn in the first quarter of 2020. This trend reversed over the course of the second quarter as central banks and governments around the globe started quantitative easing programs and economic relief packages to cushion the economic drawdowns caused by the spread of the coronavirus and the lockdowns of economies around the globe. The measures taken led to a rebound of the equity markets accompanied by falling interest rates. The return to somewhat normal market circumstances led investors to buy back into mutual funds and ETFs. As a result, the European fund industry enjoyed inflows over the course of the second and third quarters, with overall flows adding up to €297.1 bn for 2020 so far. Taking all of this into account, 2020 was—despite the inflows—a tough period for the European fund industry.

Assets Under Management in the European Fund Industry

Assets under management in the European fund industry decreased from €12.3 tr on December 31, 2019, to €12.0 tr on September 30, 2020. This decrease was mainly driven by the performance of the underlying markets (-€531.0 bn), while net sales contributed estimated net inflows of €297.1 bn.

Since 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 a further increase in popularity with all types of investors over the course of 2020, and as a result, ETFs have enjoyed inflows (+€45.8 bn) for 2020 so far. Given the general market environment, it was somewhat surprising to see a slight increase in assets under management from €870.0 bn at the end of December 2019 to €871.0 bn at the end of Q3 2020 despite a negative impact from the underlying markets (-€44.8 bn).

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

European Fund Flows Review, Year to Date, September 2020

Source: Refinitiv Lipper

For funds overall, it was not surprising that equity funds (€4.4 tr) were the asset type with the highest assets under management, followed by bond funds (€3.0 tr), mixed-assets products (€2.1 tr), money market funds (€1.5 tr), alternative UCITS funds (€0.7 tr), real estate funds (€0.3 tr), “other” products (€0.1 tr), and commodities funds (€0.1 tr).

Graph 2: Market Share by Asset Type (September 30, 2020)

European Fund Flows Review, Year to Date, September 2020

Source: Refinitiv Lipper

European Fund Flow Trends 2020 (as of September 30, 2020)

Generally speaking, 2020 was a tough period for the European fund management industry even as mutual funds and ETFs enjoyed overall inflows of €297.1 bn.

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

European Fund Flows Review, Year to Date, September 2020

Source: Refinitiv Lipper

That said, it was not surprising that ETFs (+€45.8) and mutual funds (+€251.3 bn) enjoyed inflows.

Fund Flows into Long-Term Mutual Funds

A more detailed view by asset type reveals that not all of them had inflows over the course of 2020 year to date. Bond funds (+€74.1 bn) was the best-selling asset type, followed by equity funds (+€54.3 bn), real estate funds (+€7.3 bn), commodities funds (+€7.0 bn), mixed-assets funds (+€5.7 bn), and “other” funds (-€3.5 bn). At the other end of the table, alternative UCITS funds (-€66.4 bn) was the only asset type facing outflows year to date. These fund flows added up to overall net inflows of €85.9 bn into long-term investment funds for the first nine months of the year. The flows indicate that European investors somewhat returned to risk-on mode over the course of the second and third quarters of 2020.

The European ETF segment showed similar dynamics with regard to estimated net inflows since bond ETFs also posted the highest net inflows (+€25.9 bn) for 2020 so far, followed by equity ETFs (+€17.5 bn), commodities ETFs (+€0.9 bn), mixed-assets ETFs (+€0.4 bn), alternative UCITS ETFs (+€0.2 bn), and “other” ETFs (+€0.1 bn). Even as European investors showed a preference for ETFs in 2019, the flows over the course of the first nine months of 2020 may indicate that they are using them as trading instruments since liquidity and transparency are two of the product features of ETFs.

Graph 4: Estimated Net Sales by Asset and Product Type, 2020 Year to Date (Euro Billions)

European Fund Flows Review, Year to Date, September 2020

Source: Refinitiv Lipper

Fund Flows into Money Market Products

Money market products were the best-selling asset type in Europe overall over the first three quarters of 2020 (+€211.3 bn) even as European investors bought long-term mutual funds in a risk-on move. Buying money market funds can be seen as a logical step in an uncertain market environment since these products are considered to be safe-haven products. Therefore, these fund flow trends show that European investors are still not sure about the economic outcome from the coronavirus crisis. In line with their actively managed peers, money market ETFs enjoyed inflows of €0.8 bn.

This flow pattern led to estimated net inflows of €297.1 bn into mutual funds and ETFs in Europe for the year-to-date period.

Money Market Products by Sector

Money Market EUR (+€105.5 bn), followed by Money Market USD (+€71.0 bn) and Money Market GBP (+€33.9 bn) were the three best-selling money market sectors for 2020 so far. At the other end of the spectrum, Money Market PLN (-€1.8 bn) suffered the highest net outflows in the money market segment, bettered by Money Market EUR Leveraged (-€0.4 bn) and Money Market Other (-€0.1 bn).

Fund Flows by Sectors

Equity Global (+€62.8 bn) was once again the best-selling sector within the segment of long-term mutual funds, followed by Equity Sector Information Technology (+€20.2 bn), Bond Global Corporates USD (+€16.0 bn), Bond EUR Corporates (+€13.6 bn), and Equity Sector Healthcare (+€13.0 bn).

Graph 5: The 10 Best- and Worst-Selling Sectors for 2020 Year to Date (Euro Billions)

Source: Refinitiv Lipper

At the other end of the spectrum, Bond EUR Short Term (-€15.8 bn) suffered the highest net outflows from long-term mutual funds, bettered somewhat by Bond Emerging Markets Global in Local Currencies (-€12.9 bn), Equity Emerging Markets Global (-€12.2 bn), Equity U.S. (-€11.6 bn), and Equity Eurozone (-€8.6 bn).

Assets Under Management by Promoters

A closer look at the assets under management in the European mutual fund industry shows that BlackRock (€989.8 bn) was by far the largest fund promoter in Europe, followed by Amundi (€417.9 bn), JPMorgan (€39309 bn), UBS (€353.0 bn), and DWS Group (€321.9 bn).

Graph 6: The 20 Largest Promoters by Assets Under Management in Europe as of September 30, 2020 (Euro Billions)

Source: Refinitiv Lipper

Fund Flows by Promoters

BlackRock, with net sales of €68.3 bn, was the best-selling fund promoter overall for the first nine months of 2020, ahead of JPMorgan (+€56.9 bn) and Goldman Sachs (+€23.3 bn). It is noteworthy that the overall flows of BlackRock (+€26.7 bn) JP Morgan (+€41.8 bn) and Goldman Sachs (€25.3 bn) were driven by money market products.

Graph 7: Twenty Best-Selling Promoters 2020 Year to Date (Euro Billions)

Source: Refinitiv Lipper

Considering the single-asset bases, BlackRock (+€17.8 bn) was the best-selling promoter of bond funds for the first nine month of H1 2020, followed by JPMorgan (+€10.2 bn), UBS (+€6.8 bn), Aviva (+€6.5 bn), and Credit Suisse Group (+€5.8 bn).

Within the equity space, BlackRock (+€22.7 bn) stood at the head of the table, followed by Morgan Stanley (+€8.7 bn), Vanguard Group (+€6.1 bn), Pictet (+€6.0 bn), and JPMorgan (+€5.3 bn).

ING (+€9.4 bn) was the leading promoter of mixed-assets funds in Europe for the first nine month of 2020, followed by Flossbach von Storch (+€5.9 bn), Vanguard Group (+€4.4 bn), Union Investment (+€3.3 bn), and KBC (+€2.7 bn).

GLG Partners (+€2.0 bn) was the leading promoter of alternatives funds for the year, followed by Insight (+€1.0 bn), Nordea (+€0.9 bn), DWS Group (+€0.6 bn), and Partners Group (+€0.5 bn).

Promoter Activity—Fund Launches, Liquidations, and Mergers

The year 2020 has been a tough year for the European fund industry so far, and the fourth quarter does not look very promising either. The outlook is complicated by the current economic situation and uncertainty driven by the ongoing coronavirus pandemic, the upcoming U.S. election, and sluggish negotiations on a post-Brexit deal between the EU and the U.K. Despite this difficult environment, the activity of European fund promoters in terms of fund launches, liquidations, and mergers indicated the industry is somewhat in a business-as-usual mode, even as the overall numbers of fund launches, liquidations, and mergers are below their long-term averages.

Nevertheless, we still witnessed a slight increase in the overall number of primary funds in Europe for the year 2020 so far, which may mark the beginning of the third year of growth 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 seven consecutive years.

The net growth of the number of funds for 2020 so far occurred in a rough market environment and a decline in assets under management. Therefore, it is no surprise that fund promoters showed a generally lower level of activity with regard to the maintenance of their product ranges. In more detail, the number of fund liquidations (242), mergers (223), and launches (447) in Q3 were all below the long-term quarterly averages—liquidations (345), mergers (265), and launches (490). Nevertheless, the drop in the number of fund launches led to a shrinking number of funds for Q3 since the number of launches was lower than the combined number of mergers and liquidations over the same time period. The main reason for the mergers and liquidations at the fund level were restructurings of the general product offerings. For example, some fund promoters merged funds with a similar investment objective to strengthen their product ranges.

Lower profitability because of a lack of assets under management might have been another reason why 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 other years covered in this report, as we don’t witness any excess activity for fund launches, liquidations, or mergers. Since the implementation of new regulations, such as MiFID II, does increase the cost for maintaining a fund, we expect that the trend of consolidation of small funds will continue over the course of 2020 and beyond.

Graph 8: Fund Launches, Liquidations and Mergers

Source: Refinitiv Lipper

European fund promoters liquidated 531 funds over the course of H1 2020, while 390 funds were merged into other funds. In contrast, European fund promoters launched 942 funds. This means the overall number of primary funds in Europe increased by 21 products over the course of H1 2020.

A more detailed view shows that equity funds experienced the highest number of liquidations (265) and launches (501) for the year to date, while mixed-assets funds witnessed the highest number of mergers (216). With regard to the broader trends in financial markets, it was surprising equity funds showed the highest number of fund launches given the current market environment. Therefore, it can be guessed that the launching activity in this segment was still driven by the positive market environment in 2019, as well as customer demand.

It was, however, surprising that the number of mixed-assets products declined by 31 primary funds over the course of 2020 to date. This is because mixed-assets products showed the highest activity with regard to fund launches in the past, as they were the product of choice for European investors. Therefore, the declining number of new funds might be a sign of saturation. In addition, mixed-assets products have experienced lower and more concentrated net flows over the last few years, which is another sign of saturation. The concentration of fund flows toward a small number of funds may fuel fund launches and mergers since promoters may want launch products with similar investment objectives as the successful funds and support those funds by merging them with other products. This will increase the assets under management of the new products and make them more attractive for investors.

Graph 9: Fund Launches, Liquidations and Mergers Year-to-Date by Asset Type

Source: Refinitiv Lipper

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