It’s fair to say that 2023 was a challenging year for portfolio managers around the globe since the markets were driven by a number of different factors and unpredictable incidents. Each of these could have caused a major market downturn on their own. First of all, there were a lot of geopolitical tensions around the globe beside the still ongoing war in Ukraine, which showed that democratic states might be more vulnerable than one may think. The concerns of investors, especially in Europe, increased toward the end of 2023 since the actions taken by the Houthi rebels in the Red Sea have the power to disrupt the still vulnerable delivery chains in Europe and other parts of the world.
Also, there were economic factors which burdened the expectations of investors, such as China’s failure to meet the growth expectations of investors when its economy was reopened after the end of the country’s zero-COVID strategy. Talking about China, the credit crisis in the Chinese real estate sector later in the year was another factor that could have caused a market downturn if it wasn’t handled well by the Chinese government. Nevertheless, investors are still cautious about investments in China.
After the meltdown in the bond segment during the interest hiking cycle over the course of 2022, investors hoped that the measures taken by central banks would bring down inflation and lead to falling interest rates. This assumption went against the hawkish statements of central banks around the globe for the first 10 months of 2023. The relatively high interest rates raised fears that some major economies such as the U.S. would face a hard landing. In addition to this, some investors might have recalled bad memories when the Silicon Valley Bank and two other regional banks were closed in early March 2023. These feelings might have become worse when Credit Suisse struggled later in the month and was finally taken over by UBS by governmental order.
Nevertheless, investors hope that central banks—especially the U.S. Federal Reserve—have reached the last phase of their fight against high and further increasing inflation rates given their rather dovish statements during/after the respective central bank meetings in December. With regard to this, some investors already expected that there might be room for decreasing interest rates early next year, which might be reflected by the estimated inflows in bond ETFs. Despite the dovish statements by the central banks, these estimates might be under scrutiny since inflation in the major economies seems to be more sticky than expected and central banks are held responsible to reach their inflation targets. This could mean that the expected rate cuts start later than investors expect.
In addition, there were some concerns about the possibility of a recession in the U.S. and other major economies around the globe. These fears have been raised by long-term inverted yield curves, which are seen as an early indicator for a possible recession. The normalization of the inverted yield curves might be another short-term challenge for the bond markets.
On the other hand, the spectacular performance of the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) drove the U.S. markets up. The stellar performance of these stocks might have reminded some investors of the performance of some stocks before the burst of the so-called “dot.com bubble.” As a result, many investors might have been caught between fear and greed when looking at the U.S. equity markets.
That said, some major equity indices reach new all-time high values at the end of year 2023 despite all the headwinds over the course of the year.
With regard to the above, it is no surprise that the year 2023 was a challenging year for the European fund industry. The promoters of mutual funds (-€33.0 bn) faced outflows for the year, while the promoters of ETFs in Europe (+€154.9 bn) enjoyed inflows over the course of the year. The outflows for actively managed funds were driven by mixed-assets and alternatives products, while money market and bond products were the main drivers for the inflows in actively managed products.
Within the current market environment, it is not surprising that European investors bought further into money market products since the Eurozone and other major economies have an inverted yield curve. This means that money market products offer a higher yield than medium or long-term bonds. More generally, long-term funds (+€22.7 bn) and money market products (+€172.6 bn) enjoyed inflows for the year. These flow numbers might indicate that European investors are further readjusting their portfolios to the current market environment.
Fund Flows by Asset Type
Mutual funds (+€7.0 bn), and ETFs (+€17.3 bn) enjoyed overall inflows of €21.8 bn over the course of December 2023.
Asset Type Flows December 2023
In more detail, money market funds (+€35.4 bn) were the best-selling asset type overall for December 2023. The category was followed by bond funds (+€8.8 bn), while “other” funds (-€0.3 bn), commodities funds (-€0.7 bn), alternatives funds (-€0.9 bn), equity funds (-€2.2 bn), real estate funds (-€2.9 bn), and mixed-assets funds (-€12.9 bn) faced outflows.
Graph 1: Estimated Net Flows by Asset and Product Type – December 2023 (in bn EUR)
Source: LSEG Lipper
Asset Type Flows Year to Date
The flow pattern for December drove the estimated overall net flows in the European fund industry up to €195.4 bn for the year 2023.
Mutual funds (+€40.5 bn) and ETFs enjoyed inflows of €154.9 bn over the course of the year 2023. The inflows into ETFs within the still somewhat uncertain market environment repeat a trend we saw over other periods with uncertain or rough market conditions. These periods include the financial crisis, the euro crisis, and the second half of 2018—where ETFs enjoyed inflows while mutual funds faced massive outflows. Nevertheless, this flow pattern is unusual in a market environment were equity and bond indices trending upwards.
With regards to the inverted yield curves for the Eurozone and other major economies in the world, it is no surprise that European investors favoured money market products over the course of the year. The strong inflows into bond products might be seen as a sign that European investors may anticipate the ending of the interest hiking cycle of central banks around the globe led by the U.S. Federal Reserve.
Overall, long-term investment products (+€22.7 bn) and money market funds (+€172.6 bn) enjoyed inflows for the year.
Taking a closer look, money market funds (+€172.6 bn) were the asset type with the highest estimated net inflows overall for 2023. It is followed by bond funds (+€157.7 bn). On the other hand, “other” funds (-€0.5 bn), commodities funds (-€2.3 bn), real estate funds (-€3.8 bn), equity funds (-€10.8 bn), alternatives funds (-€17.3 bn), and mixed-assets funds (-€100.3 bn) faced outflows for the year.
Graph 2: Estimated Net Sales by Asset and Product Type, January 1 – December 31, 2023 (Euro Billions)
Source: LSEG Lipper
Fund Flows Active vs Passive Products
The trend toward passive investment vehicles is widely discussed by market observers and asset managers, so it is worthwhile to highlight this topic, especially as not all passive products are ETFs. In fact, the flows into ETFs (+€154.9 bn) were outpacing the flows into passive index mutual funds (+€52.8 bn) by a large margin. Conversely, active managed mutual funds (-€12.4 bn) for 2023.
Graph 3: Estimated Net Flows by Management Approach and Product Type (January 1 – December 31, 2023)
Source: LSEG Lipper
In more detail, ETFs have witnessed inflows of €154.9 bn over the course of 2023. These flows marked the second highest inflows into ETFs in history and fell only shy of the record inflows of the year 2021 (+€161.4 bn). Therefore, 2023 will be considered as a very strong year for the European ETF industry.
Conversely, actively managed long-term mutual funds faced outflows (-€173.5 bn). That said, the inflows into money market products (+€161.2 bn) brought the overall outflows from active managed funds down (-€12.4 bn).
Some market observers may speculate that European investors are selling active managed products and buying back passive products. Generally speaking, one could agree with this thesis by looking at the high-level numbers, but since this can’t be proven by facts, I would not totally agree with this assumption.
In addition, one needs to bear in mind that the flows in money market products are impacted by a combination of asset allocation decisions of portfolio managers and corporate actions such as cash dividends or cash payments since money market funds are also used by corporations as replacements for cash accounts. Given the inverted yield curves, it can be assumed that a number of investors use money market products as replacement for cash accounts, since money market products do offer a comparably high yield within the current interest rate environment. Therefore, it can be expected that the inflows in money market products may revert once the yield curves have been normalized.
Fund Flows by Lipper Global Classifications
Fund Flows by Lipper Global Classifications, December 2023
Given the unstable economic outlooks and the inverted yield curves, it was not surprising that Money Markey EUR (+€22.5 bn) dominated the table of the 10 best-selling peer groups by estimated net flows for December. It was followed by Money Market GBP (+€11.9 bn), Target Maturity Bond 2020+ (+€4.9 bn), Equity US (+€4.8 bn), and Equity Global (+€3.1 bn).
Graph 4: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, December 2023 (Euro Millions)
Source: LSEG Lipper
On the other side of the table, Mixed Asset EUR Flexible – Global (-€3.3 bn) faced the highest estimated net outflows for December, bettered by Bond USD Government (-€2.8 bn) and Real Estate Switzerland (-€2.6 bn).
A closer look at the best- and worst-selling Lipper Global Classifications for December shows that European investors were somewhat in mixed mode with regard to their risk appetite over the course of the month. On one hand, European investors increased their positions in money market and bond classifications mainly in EUR and USD, as well as their equity exposure in some core regions. On the other hand, they reduced their exposure to non-core equity products, as well as to mixed asset products (mainly in EUR) since these products may have been used to generate yield and income over the low interest rates period.
Fund Flows by Lipper Global Classifications, Year to Date
A closer look at the best- and worst-selling Lipper Global Classifications for 2023 shows that European investors are somewhat in a mixed mood with regard to their risk appetite since money market products dominated the table of the best-selling Lipper Global Classifications.
As graph 2 shows, mixed-assets products faced the highest outflows over the course of the year 2023, while money market products enjoyed the highest inflows. Given the overall trend it was not surprising that the table of the best-selling Lipper Global Classifications is dominated by bond and money market classifications, while mixed-asset classifications dominated the other side of the table.
Money Market EUR (+€107.7 bn) was the best-selling Lipper global classification for the year. It was followed by Money Market USD (+€97.+ bn), Target Maturity Bond 2020+ (+€59.8 bn), Equity Global (+€56.8 bn), and Bond EUR Corporates (+€22.9 bn).
Graph 5: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – December 31, 2023 (Euro Billions)
Source: LSEG Lipper
Given the current market environment, it was not surprising to see so many mixed-assets classifications on the opposite side of the table since European investors seem to be readjusting their portfolios to the new environment in the bond markets after the central banks around the globe may end their interest rate hiking cycles. Money Market GBP (-€43.2 bn) faced the highest outflows for the year. It was bettered by Mixed Asset EUR Conservative – Global (-€27.8 bn), Mixed Asset EUR Flexible – Global (-€24.4 bn), Mixed Asset EUR Balanced – Global (-€19.7 bn), and Equity UK (-€18.3 bn).
As mentioned above, 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 outflows from Money Market GBP are the aftermath of the LDI crisis. It is also important to recall 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.
Fund Flows by Promoters
Fund Flows by Promoters, December 2023
BlackRock (+€10.7 bn) was the best-selling fund promoter in Europe for December, ahead of Legal & General (+€6.4 bn), Amundi (+€6.2 bn), JPMorgan (+€5.9 bn), and Goldman Sachs (+€5.7 bn). Given the product ranges of the 10-top promoters and the overall fund flow trends, it was not surprising to see that ETFs played only a major role for the positions of BlackRock, Amundi, JPMorgan, DWS, and Vanguard.
Graph 6: Ten Best-Selling Fund Promoters in Europe, December 2023 (Euro Millions)
Source: LSEG Lipper
Fund Flows by Promoters, Year to Date
The largest fund promoter in Europe, BlackRock, (+€107.8 bn) is also the best-selling fund promoter in Europe over the course of the year, ahead of JPMorgan (+€40.4 bn), HSBC (+€29.6 bn), Vanguard (+€28.1 bn), and DWS (+€19.3 bn). As for the monthly flows, it was not surprising to see that ETFs played a major role for the inflows and the respective league table positions of BlackRock, JPMorgan, Vanguard, State Street Global Advisors, DWS, and BNP Paribas.
By looking at these numbers, one needs to bear in mind that the flows in the money market segment over the course of 2023 have a significant impact on the flow numbers and positions in the league table of the best-selling fund promoters in Europe.
Graph 7: Ten Best-Selling Fund Promoters in Europe, January 1 – December 31, 2023 (Euro Billions)
Source: LSEG Lipper
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
