The heat is on active managers in Europe after passive index funds and ETFs boosted their market share in 2019. Detlef Glow, Head of EMEA Research at Lipper, analyzes the trends in European fund flows, including further weakness for alternative funds.
- Passive index funds and ETFs grew their share of the European fund market in 2019, although this area is still in its infancy when compared to the United States.
- Among the biggest surprise trends in European fund flows was the performance of alternative funds, with a second year of outflows.
- Assets flowed into bond funds despite a zero interest rate environment, with 2019’s volatile stock market rally failing to prevent an outflow in equity funds.
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Assets under management in Europe rose from 9.9 trillion euros in 2018 to 12.3 trillion euros (US$13.3 trillion) in 2019, with active funds accounting for 10.3 trillion euros ($11.1 trillion) compared with 8.4 trillion euros a year earlier.
Equity funds represented a 38 percent market share, bond funds 28 percent, mixed funds 18 percent and money market funds 12 percent.
Looking at product types, actively-managed funds still accounted for a very large percentage of the industry, but passive index funds and ETFs (exchange-traded funds) took a growing share of the market. However, in comparison to the United States, the market it still in its infancy.
While active funds in Europe accounted for 10.3 trillion euros, passives were on 2 trillion euros.
For the first time, index trackers took a higher market share than ETFs, proving that the popularity of these funds is not just a blip.
Among other surprise trends in European fund flows, assets flowed into bond funds despite a zero interest rate environment. And in the face of volatile stock market rally, there was an outflow in equity funds.
Outflows from alternative funds
In another surprise, there were high outflows from alternative funds, amid signs that investors may have reached their limits in investing in multi-asset funds.
A lot of alternative strategies have disappointed investors by not delivering returns, especially in times of high market volatility. Last year was the second year of outflows for alternative managed strategies.
In a year where active management beat the benchmarks by a higher percentage than the year before (2018), there were inflows into equity ETFs and outflows from actively managed funds.
Analyzing market share of net sales by product type, ETFs took a 31 percent market share in 2019 — a historic high — with actively managed funds at 37 percent and index trackers at 32 percent. For active managers, the competition is on.
Rise of index-tracking funds
Looking at the historical trends, index funds fell out of favor between 2004 and 2015, during a time when ETFs were cheap and available. An index fund charged 100 basis points at the time, while ETFs were 40 basis points.
Now, ETFs are below 10 basis points, and management fees for index trackers have gone down, with Fidelity even offering zero management fees, which may or may not be sustainable.
After 2015, there was a massive rush into index-tracking funds. Prices went down, as institutional investors with guidelines different to asset managers or wealth managers might not want to be involved in funds that do securities lending, or use futures or other derivatives.
Some retail investor platforms are not able to deal ETFs, so they use index funds. It’s an easy sell for an advisor.
Lipper’s analysis of European fund flows
Looking at the largest Lipper global classifications of assets under management, equity global is the largest, driven by a trend toward diversification.
The euro money market is the second largest asset class, with corporations using money market funds as a surrogate for cash accounts in order to pay dividends and so forth.
Among the worst performers, equity Europe saw the highest outflows. Looking at valuations, some argue Europe still looks attractive, compared with the U.S.
The second worst was equity eurozone, and this was followed by global bonds in British pounds, possibly due to the influence of Brexit.
Lipper Refinitiv provides impartial fund performance data in a precise, granular fund classification system