February 2024 was another month with inflows for the European fund industry. These inflows occurred in a further unstable market environment since the geopolitical tensions in Middle East, especially the Red Sea, increased over the course of the month as the European Union sent military ships to protect commercial vessels from the attacks of Houthi rebels. Nevertheless, since a number of shipping companies avoid nowadays the passage of the Suez channel, it is to be expected that the prolonged delivery times will cause some tensions for the still vulnerable delivery chains.
Market sentiment was further driven by hopes 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. That said the statements from the U.S. Fed in January about a possible start of lowering interest rates might have caught some investors on the wrong foot, as the central bank indicated that it may start the lowering of interest rates later and with less steps in 2024 than some investors expected. It looks like this statement has not impacted the estimated inflows in bond ETFs.
Nevertheless, some investors may have also reviewed their expectations for bonds, as there is the risk that the inflation in the major economies might be more sticky than expected and central banks are held responsible to reach their inflation targets. In addition, there are still 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 a lack of growth in some economies and the long-term inverted yield curves, which are seen as an early indicator for a possible recession. The normalization of inverted yield curves might be another short-term challenge for the bond markets.
On the other hand, the hype around the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) drove the U.S. markets further up despite the fact that the first members of this group have lost some attractiveness for investors. The 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 reached new all-time high values over the course of February 2024 despite the headwinds mentioned above.
Asset Type Flows
Mutual funds (-€5.9 bn) faced outflows over the course of the month, while ETFs (+€16.0 bn) enjoyed inflows. This flow pattern led to overall estimated net inflows of €10.2 bn over the course of February 2024.
Asset Type Flows February 2024
In more detail, bond funds (+€31.4 bn) were the best-selling asset type overall for February 2024. The category was followed by equity funds (+€4.4 bn) and “other” funds (+€0.03 bn), while commodities funds (-€0.3 bn), real estate funds (-€1.1 bn), alternatives funds (-€1.6 bn), money market funds (-€10.0 bn), and mixed-assets funds (-€12.7 bn) faced outflows.
Graph 1: Estimated Net Flows by Asset and Product Type – February 2024 (in bn EUR)
Source: LSEG Lipper
Asset Type Flows Year to Date
The flow pattern for February drove the estimated overall net flows in the European fund industry up to €53.7 bn for the year 2024.
Mutual funds (+€16.7 bn) and ETFs (+€37.1 bn) enjoyed inflows over the course of the year 2024 so far. These inflows within the still somewhat uncertain market environment are not considered unusual given the fact that some major market indices are still reaching new all-time highs.
With regard to the inverted yield curves for the Eurozone and other major economies in the world, it is somewhat surprising that European investors favored bond products over the course of the year. These inflows might be seen as a sign that European investors anticipate the ending of the interest hiking cycle of central banks around the globe led by the U.S. Federal Reserve sooner rather than later.
Overall, long-term investment products (+€35.2 bn) and money market funds (+€18.6 bn) enjoyed inflows for the year so far.
Taking a closer look, bond funds (+€61.1 bn) were the asset type with the highest estimated net inflows overall for 2024. It is followed by money market funds (+€18.6 bn), equity funds (+€7.8 bn), and “other” funds (+€0.1 bn). On the other side, commodities funds (-€0.2 bn), real estate funds (-€3.1 bn), alternatives funds (-€5.9 bn), and mixed-assets funds (-€24.5 bn) faced outflows for the year so far.
Graph 2: Estimated Net Sales by Asset and Product Type, January 1 – February 29, 2024 (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 (+€37.1 bn) were outpacing the flows into passive index mutual funds (+€16.6 bn) by a large margin. Conversely, actively managed mutual funds enjoyed only very shy inflows (+€0.1 bn) for the first two months of 2024.
Graph 3: Estimated Net Flows by Management Approach and Product Type (January 1 – February 29, 2024)
Source: LSEG Lipper
Some market observers may speculate that European investors are selling actively 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 replacements for cash accounts since money market products 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, February 2024
Given the unstable economic outlooks and the inverted yield curves, it was surprising that Bond Global USD (+€9.4 bn) dominated the table of the 10 best-selling peer groups by estimated net flows for February. It was followed by Equity Global (+€8.7 bn), Target Maturity Bond 2020+ (+€5.5 bn), Equity US (+€4.3 bn), and Money Market USD (+€3.5 bn).
Graph 4: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, February 2024 (Euro Millions)
Source: LSEG Lipper
On the other side of the table, Money Market EUR (-€8.5 bn) faced the highest estimated net outflows for February, bettered by Money Market GBP (-€6.7 bn) and Mixed Asset GBP Balanced (-€3.7 bn).
A closer look at the best- and worst-selling Lipper Global Classifications for February shows that European investors were somewhat in risk-on mode with regard to their risk appetite over the course of the month. On one hand, European investors increased their positions in bond and equity classifications mainly in USD. On the other hand, they further reduced their exposure to mixed-assets 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 the first two months of 2024 also shows that European investors are somewhat in a risk-on mode with regard to their risk appetite since long-term products are dominating 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 2024, 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 is dominated by bond and equity classifications, while mixed-asset classifications dominated the other side of the table.
Equity Global (+€15.4 bn) was the best-selling Lipper global classification for the year so far. It was followed by Bond Global USD (+€15.4 bn), Money Market USD (+€14.7 bn), Target Maturity Bond 2020+ (+€8.7 bn), and Equity US (+€8.6 bn).
Graph 5: Ten Best- and Worst-Selling Lipper Global Classifications by Estimated Net Sales, January 1 – February 29, 2024 (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. Mixed Asset GBP Balanced (-€5.5 bn) faced the highest outflows for the year. It was bettered by Mixed Asset EUR Flexible – Global (-€5.3 bn), Money Market GBP (-€5.2 bn), Mixed Asset EUR Balanced – Global (-€4.7 bn), and Mixed Asset EUR Conservative – Global (-€4.4 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, February 2024
UBS (+€7.4 bn) was the best-selling fund promoter in Europe for February, ahead of Vanguard (+€3.6 bn), DWS (+€3.5 bn), HSBC (+€3.5 bn), and State Street Global Advisors (+€3.2 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 an important role for the positions of the leading fund promoters in Europe.
Graph 6: Ten Best-Selling Fund Promoters in Europe, February 2024 (Euro Millions)
Source: LSEG Lipper
Fund Flows by Promoters, Year to Date
HSBC (+€10.1 bn) is the best-selling fund promoter in Europe over the course of the year so far, ahead of JPMorgan (+€8.8 bn), UBS (+€8.5 bn), BlackRock (+€6.8 bn), and Vanguard (+€6.3 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 the leading fund promoter in Europe.
Graph 7: Ten Best-Selling Fund Promoters in Europe, January 1 – February 29, 2024 (Euro Billions)
Source: LSEG Lipper
The views expressed are the views of the author and not necessarily those of LSEG.
