by Detlef Glow.
It was not surprising to witness that the European fund industry enjoyed inflows over the course of the first half of 2023. Nevertheless, these inflows occurred in an unstable market environment in which some asset classes showed positive results, while others performed negatively. The market sentiment was still driven by hopes that central banks, especially the U.S. Federal Reserve, may have reached the last phase of their fight against high inflation rates and may, therefore, start to keep interest rates at least stable quite soon. Some investors already expect that there might be room for decreasing interest rates later this year, but these expectations might be too positive given the hawkish statements from the FED and other central banks. In addition, there are still some concerns about geopolitical tensions, and the normalization of the disrupted delivery chains, even as China seems to be back on track after re-opening of the economy, Additionally, market participants are still concerns about a possible recession in the U.S. and other major economies around the globe. These fears are raised by long-term (12 month +) inverted yield curves which are seen as an early indicator for a possible recession.
That said, mutual fund promoters (-€28.6 bn) faced outflows, while ETF promoters (+€70.2 bn) enjoyed inflows over the course of the first six months of 2023. The outflows from actively managed funds were driven by outflows from mixed-assets funds (-€43.8 bn) and alternatives funds (-€26.2 bn). Within the current market environment, it is somewhat surprising that European investors didn’t buy more money market products, since the Eurozone has an inverted yield curve, which means that money market products offer a higher yield than medium or long-term bonds. More generally, long-term funds (+€35.8 bn) and money market products (+€5.9 bn) enjoyed inflows for the year so far. These flow numbers might be seen as a sign that European investors are still somewhat in a risk-on mode, as they increased their direct exposure to bonds and equities markets.
Although the headline numbers look like the first half of 2023 was business as usual for the European fund industry, the underlying fund flow trends show a different picture, as the aftermath of the LDI crisis in October 2022 drove the fund flow trends for several Lipper Global Classification, affecting the domiciles of the impacted funds. That said, the large outflows from Money Market GBP and Mixed Asset GBP Balanced classifications were driven by only eight funds.
Despite a somewhat positive market environment, the overall assets under management in the European fund industry (€14,087.6 bn) were still below their all-time year-end high (€15,266.2 bn as of December 31, 2021). Despite this, the assets under management in the European ETF industry hit a new all-time high at the end of June 2023 (€1,407.7 bn).
Graph 1: Assets Under Management in the European Fund Industry by Product Type – June 30 2023 (in bn EUR)
Source: LSEG Lipper
In more detail, equity funds (€5,877.7 bn) held the highest assets under management in the European fund industry at the end of June 2023. It was followed by bond fund (€3,115.6 bn), mixed assets funds (€2,456.9 bn), money market funds (€1,623.5 bn), alternatives funds (€577.0 bn), real estate funds (€300.3 bn), “other” funds (€73.5 bn), and commodities funds (€63.2 bn).
Graph 2: Market Share of Assets Under Management in the European Fund Industry by Asset Type – June 30 2023 (in bn EUR)
Source: LSEG Lipper
The European fund industry faced overall outflows (-€10.4 bn) over the course of June 2023, as both long-term (-€6.8 bn) and money market products (-€3.6 bn) faced outflows. In more detail, bond funds (+€18.1 bn) were the best-selling asset type overall for June 2023. The category was followed by real estate funds (+€0.1 bn), while all other asset types faced outflows. Commodities funds (-€0.5 bn), “other” funds (-€1.4 bn), money market funds (-€3.6 bn), alternative funds (-€5.4 bn), mixed-assets funds (-€8.1 bn), and equity funds (-€9.6 bn).
Graph 3: Estimated Net Flows by Asset and Product Type – June 2023 (in bn EUR)
The flow pattern for June drove the estimated overall net flows to €41.7 bn year-to-date.
While mutual funds (-€28.6 bn) faced estimated net outflows, ETFs enjoyed inflows of €70.2 bn over the course of the first six months of 2023. The inflows into ETFs within the positive, but still somewhat uncertain, market environment repeat a trend we witnessed over other rough market periods such as the fourth quarter of 2018 or the financial crisis (2008), where ETFs enjoyed inflows while mutual funds faced massive outflows.
Despite the inverted yield curve for Eurozone bonds, European investors bought further into bond funds, which might be seen as a sign that European investors June anticipate a possible ending of the interest hiking cycle of central banks around the globe led by the U.S. Federal Reserve. This positioning might be seen as a bet against the hawkish statements of the FED and the ECB who were indicating that they will further hike interest rates.
Overall, long-term investment products (+€35.8 bn) and money market funds (+€5.9 bn) enjoyed inflows for the year so far.
Taking a closer look, bond funds (+€96.8 bn) were the asset type with the highest estimated net inflows overall for 2023 so far. This was followed by equity funds (+€11.2 bn) and money market funds (+€5.9 bn). On the other hand, “other” funds (-€0.1 bn), real estate funds (-€0.3 bn), commodities funds (-€2.0 bn), alternatives funds (-€26.2 bn), and mixed-assets funds (-€43.8 bn) faced outflows for the year-to-date.
Graph 4: Estimated Net Sales by Asset and Product Type, January 1 – June 30 2023 (in bn EUR)
Source: LSEG Lipper
The overall inflows into money market products over the course of the first half of 2023 were driven by inflows into Money Market EUR (+€25.4 bn), and Money Market USD (+€21.2 bn), Money Market CHF (+€3.0 bn), as well as Money Market Global (+€1.6 bn), and Money Market NOK (+€1.0 bn). That said, the main driver for the overall flows in money market products were the outflows from Money Market GBP (-€49.2 bn).
In more detail, given the current environment with inverted yield curves in several countries around the world, it is to be expected that investors buy money market products, since these products pay in such circumstances higher interest rates than bond funds.
The outflows from products classified as Money Market GBP are assumed to be the aftermath of LDI crisis as there were inflows of (+€80.7 bn) into money market products classified as Money Market GBP in October 2022. (Please read the European Fund Industry Review, October 2022 for more details.)
Graph 5: Estimated Net Sales in Money Market Products by Lipper Global Classification, January 1 – June 30, 2023 (in bn EUR)
Source: LSEG Lipper
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. In addition, one needs to bear in mind that the yield curves in the Eurozone and other parts of the world are currently inverted, which means that money market instruments offer a higher yield than medium or long-term bonds.
The trend toward passive investment vehicles is widely discussed by market observers and asset managers, so it is worthwhile to highlight this topic. At the end of June 2023 it looks like the trend towards passive products has accelerated further, since ETFs (+€70.2 bn) and passively managed index mutual funds (+€20.1 bn) enjoyed healthy inflows over the course of the first half of 2023, while active managed mutual funds faced outflows (-€48.6 bn). This trend is also reflected in the asset type flows as shown in graph 4.
Graph 6: Estimated Net Flows by Management Approach and Product Type (January 1 – June 30, 2023)
Source: LSEG Lipper
When it comes to the overall sales for June, it was not surprising that Bond USD Government (+€5.2 bn) dominated the table of the 10 best-selling peer groups by estimated net flows, since bond funds enjoyed the highest inflows for the month. It was followed by Target Maturity Bond 2020+ (+€3.5 bn), Equity Global (+€3.4 bn), Mixed Asset GBP Aggressive (+€3.0 bn), and Bond Global EUR (+€2.5 bn).
Graph 7: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, June 2023 (in bn EUR)
Source: LSEG Lipper
On the other side of the table, Money Market USD (-€3.0 bn) suffered the highest estimated net outflows for June, bettered by Equity Europe (-€2.9 bn) and Mixed Asset EUR Flexible – Global (-€2.8 bn).
A closer look at the best- and worst-selling Lipper Global Classifications for June shows that European investors were somewhat in mixed mode regarding their risk appetite over the course of the month. In more detail, European investors increased their positions in bond classifications mainly in EUR and USD, while they sold money market products in USD. On the equity side, European investors preferred diversified portfolios since Equity Global and Equity Global Income were the only two equity classifications within the ten best-selling Lipper Global Classifications for the month.
The fund flow numbers for Equity US (outflows from active managed funds (-€4.1 bn) and inflows into ETFs (+€2.8 bn)) may look somewhat strange at first sight, but this combination of flows might be explainable with profit taking by some investors and a relocation of assets to take profit of the tax advantage of Ireland domiciled ETFs invested in US equities compared to other fund domiciles in Europe. The same might be true for funds and ETFs investing in global equities, since US equities are normally the largest portion of a global equity portfolio.
A closer look at the best- and worst-selling Lipper Global Classifications for the first six months of 2023 shows that European investors are somewhat in a mixed mode with regard to their risk appetite, since Equity Global dominated the table of the best-selling Lipper Global Classifications, while at the same time money market products (Money Market EUR and Money Market USD) had roughly the same combined inflows as the two equity classifications (Equity Global and Equity Emerging Markets Global) within the five best-selling Lipper Global Classifications.
As graph 4 shows, mixed-assets products faced the highest outflows over the course of the year so far, while bond 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 dominated by bond classifications, with two equity categories and two money market classification, as well as one mixed-assets classification joining the table of the 10 best-selling Lipper global classifications. Equity Global (+€33.1 bn) was the best-selling peer group for the year so far. It was followed by Target Maturity Bond 2020+ (+€30.4 bn), Money Market EUR (+€25.4 bn), Money Market USD (+€21.2 bn), and Equity Emerging Markets Global (+€15.8 bn).
Graph 8: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – June 30, 2023 (in bn EUR)
Source: LSEG Lipper
Given the current market environment, it was surprising to see so many mixed-assets classifications at the opposite side of the table. Money Market GBP (-€49.2 bn) faced the highest outflows for the year so far. It was bettered by Mixed Asset GBP Balanced (-€15.6 bn), Mixed Asset EUR Flex – Global (-€13.6 bn), Mixed Asset EUR Cons – Global (-€11.7 bn) and Bond EUR Short Term (-€10.6 bn).
Opposite to the estimated fund flows by Lipper Global Classification for June 2023, there is no evidence in the year-to-date data that European investors are switching from active managed funds into Ireland domiciled ETFs to take profit from the tax advantage for Irish ETFs investing in US equities.
The fund flows for the classifications Money Market GBP and Mixed Asset GBP Balanced seem to be impacted by the aftermath of LDI crisis as of October 2022. Please read more about the details in the chapters: MONEY MARKET FLOWS; YEAR-TO-DATE and FUND FLOWS BY FUND DOMICILE, YEAR-TO-DATE of this report.
BlackRock (+€8.1 bn) was the best-selling fund promoter in Europe for June, ahead of HSBC (+€6.4 bn), BNP Paribas (+€5.1 bn), M&G Investments (+€4.4 bn), and Morgan Stanley (+€3.1 bn). Given the product ranges of the 10-top promoters and the overall fund flow trends, it was surprising to see that ETFs didn’t play a more significant role for the positions of the leading fund promoter in Europe, with the exception of BlackRock and Vanguard.
Graph 9: Ten Best-Selling Fund Promoters in Europe, June 2023 (in bn EUR)
Source: LSEG Lipper
The largest fund promoter in Europe, BlackRock, (+€44.0 bn) is the best-selling fund promoter in Europe over the course of the year so far, ahead of JPMorgan (+€18.7 bn), Vanguard (+€16.1 bn), BNP Paribas (+€15.0 bn), and Swisscanto (+€12.4 bn).
By looking at these numbers, one needs to bear in mind that the flows in the money market segment over the course of 2023 so far have a significant impact on the flow numbers and positions in the league table of the best-selling fund promoters in Europe.
With regard to the trend towards ETFs, it is not surprising to see that the inflows into ETFs were key for positions of BlackRock and DWS Group. That said, DWS Group had outflows from actively managed funds and wouldn’t be on the table of the 10 best-selling fund promoters in Europe if they would had strong inflows into ETFs.
Graph 10: Ten Best-Selling Fund Promoters in Europe, January 1 – June 30, 2023 (in bn EUR)
Source: LSEG Lipper
To analyse the European fund industry on fund domicile level, it is necessary to look at the size of the fund domiciles first, to better understand the fund flow trends within the different fund domiciles.
Luxembourg is by far the largest fund domicile in Europe (AUM €4,314.9 bn) overall, but it is only the second largest ETF domicile in Europe, while Ireland is the second largest fund domicile in Europe (AUM €3,020.7 bn) overall, but the largest ETF domicile Europe. The two leading domiciles are followed by the UK (AUM €2,023.2 bn), which is not an ETF domicile, and France (AUM €980.1 bn), as well as Switzerland (AUM €854.3 bn), which both hold minor assets in ETFs.
Graph 11: Assets Under Management by Fund Domicile, June 30 2023 (in bn EUR)
Source: LSEG Lipper
That said, this constellation in assets under management means that Luxembourg and Ireland are in general mostly effected by the overall fund flow trends, while the other domiciles are in general more impacted by local fund flow trends.
A first view on the fund flow picture by fund domicile may give the impression that investors pulled out money from active managed products domiciled in Luxembourg and Ireland and invested the resulting cash into ETFs in the same domicile. As is to be expected, the underlying fund flow trends are more complex than this and need to be analysed in more detail.
The overall fund flows for Ireland (+€0.01 bn) year-to-date were heavily impacted by the aftermath of the Liability-Driven-Investments (LDI) crisis in the U.K. in October 2022, when pension funds had to sell bonds to reduce the overall bond market risk in their portfolios and bought money products as collateral for their derivatives based LDI-strategies instead. Since the markets have normalized these investors need less collateral and have started to sell their positions in Irish domiciled funds classified as Money Market GBP (-€48.4 bn). These flows were driven by only four products from promoters which are also active in the LDI segment. In addition to this, there were also three funds classified as Mixed Asset GBP Balanced which seem to be related to LDI-strategies with major outflows, since these funds were liquidated in February 2023. In more detail, the outflows from these three funds accounted for more outflows (-€5.3 bn), than the overall outflows of the classification (-€5.2 bn),
On the other hand, Irish domiciled funds classified as Bond Global USD (+€9.0 bn) enjoyed the highest overall inflows, followed by funds classified as Money Market EUR (+€6.3 bn), and Bond EUR Corporates (+€2.0 bn). Which means that the assets withdrawn from the Money Market GBP and Mixed Asset GBP Balanced classifications were either reinvested in assets with another base currency or have been used to meet cash demands from third parties.
Graph 12: Estimated Fund Flows by Fund Domiciles, January 1 – June 30, 2023 (in bn EUR)
Source: LSEG Lipper
The estimated fund flows for Luxembourg were mainly not impacted by the re-shuffling of LDI-strategies, even though it can’t be said that no money flew from Ireland to Luxembourg, since there were some products with GBP as base currency that witnessed in- or outflows over the course of the first six months of 2023. Equity US (-€7.7 bn) was the classification with the highest outflows from Luxembourg-domiciled funds. Even though one may expect that these outflows were invested in Irish domiciled ETFs, to take advantage from the taxation agreement between Ireland and the US, it is fair to say that these flows are not reflected in Equity US ETFs. Therefore, these flows might be rather seen as profit taking. That said, the main driver for the outflows from Luxembourg domiciled funds were mixed-assets funds, since Mixed Asset EUR Flexible – Global (-€6.7 bn), Mixed Asset EUR Balanced – Global (-€4.9 bn), and Mixed Asset EUR Conservative – Global (-€3.9 bn) accounted for more than half of the overall outflows from Luxembourg domiciled mutual funds (-€26.5 bn). These fund flows might be a result of the disappointing performance of some mixed-assets funds over the course of 2022. Some of these flows, especially those in Mixed Asset EUR – Conservative might also be a result of a general shift in asset allocation, since some of these products have been used as replacement for bond funds during the low interest rate environment.
Another contributor to the outflows from Luxembourg domiciled funds were those classified as Equity Europe (-€5.6 bn). These outflows repeat a long-term trend in the European fund industry, as European investors are net-sellers of European equities funds for a long time.
On the other side of the table, Luxembourg-domiciled funds classified as Money Market USD (+€23.5 bn) led the table by a wide margin, which means that European investors wanted to take advantage from the inverted yield curve in the US. Target Maturity Bond EUR 2020+ (+€6.3 bn), Bond USD (+€5.7 bn), Bond Global EUR (+€3.8 bn) and Bond EUR Corporates (+€3.3 bn) were the following Lipper classifications with the highest inflows. Which means that European investors shifted money from Luxembourg domiciled equity and mixed-assets funds to Luxembourg domiciled bond funds. With regard to this, it is noteworthy that some specialist bond classifications faced also outflows, which means that European investors prefer broad diversified products over products with a small investment universe.
More generally, Switzerland (+€28.4 bn) was the fund domicile with the highest estimated net inflows over the first half 2023. It was followed by Spain (+€13.6 bn), Germany (+€7.3 bn), Sweden (+€4.7 bn), and the Netherlands (+€4.5 bn).