October 31, 2022

Monday Morning Memo: European Fund Market Trends, Year-to-Date Q3 2022

by Detlef Glow.

Given the current economic situation around the globe it was no surprise that the European fund industry faced declining assets under management over the course of the year 2022 so far, as the geopolitical situation in Europe, the still ongoing COVID-19 pandemic, disrupted delivery chains, increasing inflation, and interest rate hikes put some pressure on the securities markets.

Within this environment, the assets under management in the European fund industry decreased from €15.3 tr (as of December 31, 2021) to €13.3 tr at the end of Q3 2022. While ETFs held €1.2 tr, or 9.23% of the assets under management in Europe, the vast majority (€11.8 tr, or 90.77%), were held by mutual funds.

Graph 1: Assets Under Management by Product Type (Euro Billions), September 30, 2022

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

The majority of assets were held by equity funds (€5.4 tr) followed by bond funds (€3.0 tr), mixed-assets funds (€2.4 tr), money market funds (€1.4 tr), alternative UCITS funds (€0.6 tr), real estate funds (€0.3 tr), “other” funds (€0.1 tr), and commodities funds (€0.1 tr).

Graph 2: Market Share Assets Under Management by Asset Type (June 30, 2022)

Source: Refinitiv Lipper

With regard to the market share of ESG-related products, one might be surprised that products with an ESG-related investment approach account for €6.4 tr, or 49.30%, of the overall assets in the European fund industry, while conventional funds account for €6.6 tr, or 50.70%, of the overall assets.

Looking at these numbers, one needs to bear in mind that fund promoters in Europe have repurposed a high number of conventional funds to ESG-related funds to align their product ranges either with their in-house sustainability strategy and targets or with the market demand. This is because investors have shifted assets toward ESG-related products since after the introduction of the EU action plan to financing sustainable growth and the respective regulations.

Graph 3: Market Share by Investment Objective, September 30, 2022

Source: Refinitiv Lipper

 

European Fund Flow Trends Q3 2022

After the record inflows for mutual funds (2020 and 2021) and ETFs (2021), the European fund industry witnessed estimated overall net outflows of €323.6 bn for the year 2022 to date.

Graph 4: Estimated Annual Fund Flows by Product Type, December 2003 – September 2022 (Euro Billions)

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

Within this market environment and given the economic uncertainties, one would expect that European investors sold long-term funds and bought money market products. Therefore, it is somewhat surprising that European investors continued to sell money market products (-€151.6 bn) over the course of 2022 so far.

The high outflows from money market products are somewhat surprising within the current market environment since these products are considered to be so-called safe-haven products. Therefore, this trend might be a hint that European investors want to protect their portfolios from the impact of high inflation rates. The same might be somewhat true for the outflows from bond funds, as bonds which have been issued during the low interest rate environment are not able to compensate investors for the high inflation rates. In addition, bonds are supposed to face losses from the shift in central bank policies around the globe.

As for the above, it was no surprise that long-term funds faced estimated net outflows of €181.0 bn.

While mutual funds (-€384.9 bn) faced estimated net outflows, ETFs enjoyed inflows of €52.2 bn over the course of 2022. The inflows into ETFs within this market environment repeat a trend we witnessed over other rough market periods such as the financial crisis or the euro crisis, where ETFs enjoyed inflows while mutual funds faced massive outflows.

Current investor behavior shows that European investors are somewhat in a risk-off mode.

Taking a closer look, mixed-assets funds (+€24.8 bn) were the asset type with the highest estimated net inflows overall for 2022 so far. It is followed by real estate funds (+€10.1 bn). Meanwhile, “other” funds (-€3.1 bn), commodities funds (-€6.2 bn), alternative UCITS funds (-€22.6 bn), equity funds (-€59.0 bn), bond funds (-€125.0 bn), and money market funds (-€151.6 bn) faced estimated overall outflows for the year so far.

Graph 5: Estimated Net Sales by Asset and Product Type, January 1 – September 30, 2022 (Euro Billions)

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

 

Flows in ESG-Related Products

In line with their conventional peers (-€239.9 bn), ESG-related products faced estimated overall outflows (-€92.8 bn).

A more detailed view of the flow numbers by asset type for ESG-related products shows that mixed-assets funds (+€26.8 bn) were the asset type with the highest estimated net inflows overall for 2022 year to date. It is followed by equity funds (+€21.9 bn), real estate funds (+€8.8 bn), alternative UCITS funds (+€1.2 bn), commodities funds (+€0.2 bn), ”other” funds (+€0.5 bn), and Meanwhile, bond funds (-€59.4 bn), and money market funds (-€93.1 bn) were the only asset types with estimated overall outflows for the year so far.

Graph 6: Estimated Net Sales by Asset Type and Investment Objective, January 1 – September 30, 2022 (Euro Billions)

Source: Refinitiv Lipper

By looking at the estimated net flows of the respective Sustainable Finance Disclosure Regulation (SFDR) classifications, one might be surprised that unclassified ESG-related products enjoyed the highest inflows (+€59.2 bn). The category was followed by fund products classified as article 9 (+€32.8 bn), article 6 (-€4.8 bn), article 8 (-€173.1 bn) compliant, and conventional products (-€239.9 bn).

At first glance, these flows seem to be counterintuitive, but since this report does also cover countries outside the European Union such as Switzerland and the UK, one should not be surprised by these numbers—especially as Switzerland was the fund domicile with the highest overall inflows for the first nine months of 2022.

In addition to this, the relabeling of existing ETFs and mutual funds might have contributed to the estimated overall fund flow numbers within these statistics.

Graph 7: Estimated Net Flows by SFDR Classification (January 1 – September 30, 2022)

Source: Refinitiv Lipper

 

Money Market Products

With a market share of 10.69% of the overall assets under management in the European fund management industry, money market products are the fourth largest asset type. Therefore, it is worthwhile to briefly review the trends in this market segment. Since the market environment was rather uncertain with the current geopolitical tensions in Europe and other parts of the world, disrupted supply chains, an increasing inflation, and the still further exacerbating situation around the COVID-19 pandemic, it was somewhat surprising that European investors decreased their money market positions over the course of the year 2022 so far. Money market funds faced estimated net outflows for the year (-€151.6 bn). As opposed to their active peers (-€152.8 bn), ETFs investing in money market instruments contributed estimated net inflows of €1.2 bn to the total.

 

Money Market Products by Lipper Global Classification

In more detail, Money Market Global (+€3.5 bn) was the best seller within the money market segment, followed by Money Market CHF (+€0.8 bn) and Money Market SEK (+€0.8 bn). At the other end of the spectrum, Money Market EUR (-€87.1 bn) suffered the highest net outflows overall, bettered by Money Market GBP (-€52.0 bn) and Money Market USD (-€14.5 bn).

By looking at these numbers, one needs to bear in mind that the flows in the money market segment are not only driven by asset allocation decisions of portfolio managers since money market funds are also used by corporations as replacements for cash accounts which may have used their assets in money market products for corporate actions such as cash dividends or cash payments.

Graph 8: Estimated Net Flows in Money Market Products by LGC – January 1 – September 30, 2022 (Euro Billions)

Source: Refinitiv Lipper

 

Active Versus Passive Products

The trend toward passive investment vehicles is—especially after the new record inflows over the course of 2022—widely discussed by market observers and asset managers, so it is worthwhile to highlight this topic, especially since not all passive products are ETFs. In fact, the flows into ETFs (+€52.2 bn) were outpacing the flows into passive index mutual funds (€8.2 bn) for 2022 so far.

 

Graph 9: Estimated Net Flows by Management Approach and Product Type (January 1 – September 30, 2022)

Source: Refinitiv Lipper

The trend toward passive investment products (ETFs and index tracking mutual funds) within periods of market turmoil and/or insecurity is a trend we witnessed over other rough market periods such as the financial crisis or the euro crisis, where ETFs enjoyed inflows while mutual funds faced massive outflows. This investor behavior might show European investors prefer the high transparency of ETFs and index tracking mutual funds, as well as the high (intraday) liquidity of ETFs over the typical black box approach of actively managed mutual funds, which can only be traded once a day (or in some cases once a week/month).

 

Fund Flows by Lipper Global Classifications

For the first nine month of 2022, we see a more general trend toward broadly diversified products since four of the 10 best-selling Lipper Global Classifications were mixed-assets classifications, while two were global equity classifications. The year-to-date flows clearly show that European investors have reduced their money market exposure. This flow pattern shows somewhat mixed signals as a view on the year-to-date numbers may lead to the assumption that European investors are somewhat in a risk-on mode.

As graph 5 shows, money market products faced the highest outflows over the course of 2022 so far, while mixed-assets 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 was mainly split between the equity and mixed-assets peer groups, with only two bond and one real estate, as well as one alternative UCITS category joining the table of the 10 best-selling Lipper global classifications. Equity Global (+€33.9 bn) was the best-selling peer group for the year so far. It was followed by Bond USD Government (+€21.3 bn), Equity Global Income (+€16.1 bn), Mixed Asset EUR Balanced – Global (+€11.4 bn), and Real Estate Switzerland (+€9.1 bn). Given the current market environment, it would not be surprising to see a lot of change in the best-selling Lipper Global Classifications on a year-to-date basis over the course of the next few months.

Graph 10: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – September 30, 2022 (Euro Billions)

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

Surprisingly, the so-called safe-haven favorites were at the opposite side of the table. Money Market EUR (-€87.9 bn) faced the highest outflows for the year so far. It was bettered by Money Market GBP (-€51.2 bn), Equity Europe (-€20.1 bn), Bond Global EUR (-€18.7 bn), and Bond Other (-€18.4 bn).

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.

 

Fund Flows by Promoters

BlackRock (+€14.0 bn) leads the table for the best-selling fund promoter for the year so far, followed by HSBC (+€13.9 bn), Vanguard (+€10.5 bn), Swisscanto (+€9.9 bn), and M&G (+€6.8 bn). As graph 11 shows, the flows into ETFs played a major role for the companies on the list of the 10-best-selling fund promoters with a respective product offering.

By looking at these numbers, one needs to bear in mind that outflows from money market products over the course of 2022 so far have a significant impact on the flow numbers and positions in the league table of the leading fund promoters in Europe.

Graph 11: Ten Best-Selling Fund Promoters in Europe, January 1 – September 30, 2022 (Euro Billions)

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

 

Fund Flows by Fund Domiciles

Single-fund domicile flows (including those to money market products) showed, in general, a negative picture over the course of 2022 so far. Only 17 of the 35 markets covered in this report showed estimated net inflows, while 18 showed net outflows. Switzerland (+€39.3 bn) was the fund domicile with the highest net inflows for the year so far, followed by Spain (+€8.6 bn), Germany (+€8.0 bn), Belgium (+€3.5 bn), and Liechtenstein (+€2.7 bn). On the other side of the table, Luxembourg (-€192.3 bn) was the fund domicile with the highest outflows, bettered by France (-€87.8 bn) and Ireland (-€60.1 bn). It is noteworthy that the fund flows for France, Luxembourg, and Ireland were impacted by outflows from the money market segment.

Graph 12: Estimated Net Sales by Fund Domiciles, January 1 – September 30, 2022 (Euro Billions)

Source: Refinitiv Lipper

 

Promoter Activity—Fund Launches, Liquidations, and Mergers

Within the current market environment, one would expect that the promoters of mutual funds and ETFs may hold back product launches and focus on the restructuring of their product ranges by liquidating or merging unprofitable products. Contrary to this expectation, the number of funds in the European fund industry increased over the course of Q1 2022 (+87), Q2 2022 (+100), and Q3 2022 (+169). Therefore, it looks like the activity of European fund promoters in terms of fund launches, liquidations, and mergers is further in a business-as-usual mode. With regard to the current trend, we expect to see the fifth year of growth since Lipper began to study these developments in 2012. More generally, the decreasing number of fund liquidations and mergers were not able to set off the number of fund launches, which is relatively stable since 2012.

The net increasing number of funds for the first nine month of 2022 occurred in a volatile and negative market environment with estimated net outflows from mutual funds and decreasing assets under management. Therefore, it was somewhat surprising that fund promoters showed a generally lower level of activity regarding the maintenance of their existing product ranges. In more detail, the number of fund liquidations (511) and mergers (585) were below the long-term three-month average (917 and 728, respectively), while the number of fund launches (1,452) was above the long-term three-month average (1,415). Nevertheless, the drop in the number of fund mergers and liquidations led in combination with the increased number of fund launches to an overall increasing number of funds (356) for the year so far. One of the reasons for the mergers and liquidations at the fund level were restructurings of the general product offerings. For example, some fund promoters may merge 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 EU Taxonomy or MiFID II, does increase the cost for maintaining a fund, we expect that the trend of consolidation of small funds will continue in 2022 and beyond.

Graph 13: Fund Launches, Liquidations, and Mergers

European Fund Market Trends, Q3 2020

Source: Refinitiv Lipper

European fund promoters liquidated 511 funds over the course of first nine month of 2022, while 585 funds were merged into other funds. In contrast, European fund promoters launched 1,452 funds. This means the overall number of primary funds in Europe increased by 356 products over the course of the first nine months of 2022.

A more detailed view shows that equity funds experienced the highest number of liquidations (184) and launches (566) for the nine months of the year, while mixed-asset funds witnessed the highest number of mergers (221). With regard to the broader trends in financial markets and the trends in the European fund industry, it was not surprising equity funds showed the highest number of fund launches and liquidations given the fact equities is the asset type with the highest number of products within the European fund industry. The underlying trends for the high activity in this sector might be the current market environment and the trends toward passive and/or ESG-related products. Especially the latter is also true for other asset classes.

The relatively low number of new mixed-assets products (+38) might be seen as a sign of market saturation even as mixed-assets products have experienced high but somewhat concentrated inflows over the course of the year 2022 so far. That said, 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 successor funds and support the assets under management of 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 14: Fund Launches, Liquidations, and Mergers Year to Date Q3 2022 by Asset Type

Source: Refinitiv Lipper

 

The views expressed are the views of the author and not necessarily those of Refinitiv or LSEG.

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice

 

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