There is something strangely reassuring about seeing festive decorations being displayed in a large London department store only a few days after the hottest September day in 60 years. With one final flourish, summer is gone. Brexit is slowly being absorbed as we quietly go about our business. Light trading volumes and asset allocation indecision should now be replaced with conviction and some assertion on the part of investors, heading into the final quarter of the year.
After the torpor of summer, what do pan-European fund flows reveal?
June and July European fund flow data revealed considerable Brexit-induced risk aversion, with investors taking flight from broad-based pan-European and UK equities funds and flocking into Dublin-based money market vehicles. August European data from Thomson Reuters Lipper revealed that, although many investors are continuing to keep their powder dry (dollar, sterling and euro-denominated money market funds collected over €14bn in August), others appear to have decided where they want to be by year’s end.
Emerging markets are proving popular
Other than money market fund movements, the best-selling sector for Europe for August was global emerging markets equity funds, which collected €4.6bn of net sales for the month. It was followed by bond global (+€3.5bn), bond emerging markets in hard currencies (+€2.9bn) and bond emerging markets in local currencies (+€2.2bn).
It appears then that after five years in the wilderness, emerging markets might finally be showing a return to favour. In Europe Brexit has confirmed a “lower for longer” interest rate environment, providing a natural feeder into riskier yield-bearing assets. The US too seems to be unable to provide a guaranteed upward trajectory in rates, despite expectations.
There is also now a confluence of strong performance to encourage investors. Last summer’s memory of the China “wobble” and its accompanying volatility feels distant; for 2016 year to date the average return of funds in the IA Global Emerging Markets equity sector is 29 per cent (to August 31) with the IA Global Emerging Markets bond sector average returning 26 per cent and China/Greater China 18.7 per cent over the same period. That makes the return of the IA Sterling High Yield sector of 9.3 per cent on average look somewhat Spartan by comparison.
This may auger well for future potential flows into emerging markets. Investors have suggested – with a sudden return of appetite for previously shunned local-currency debt – that they are also prepared to take on EM currency risk.
How did fund domiciles do in August?
More broadly, flows for single fund markets showed a slightly positive picture for August, with 18 of the 34 markets covered by Thomson Reuters Lipper revealing net inflows and 16 showing net outflows. Luxembourg topped the list of domiciles with the highest overall net inflows list (+€21.1bn) followed by Ireland (+€12.4bn), France (+€5bn), the UK (+€2.7bn) and Switzerland (+€1.7bn). Meanwhile, Belgium was the single market with the highest net outflows (-€1.8bn), bettered by the Netherlands (-€1bn) and Italy (-€0.4bn).
How did fund groups fare?
Overall, August was a good month in Europe for JP Morgan, which netted sales of €6.9bn. BlackRock was in second place (+€4.7bn) and HSBC in third (+€2.8bn).
Looking at individual assets, BlackRock was the best selling promoter of bond funds for August (+€3.4bn) followed by PIMCO (+€2.4bn), KBC (+€2.0bn), AB (+€1.1bn), and Danske (+€1bn).
Within the equity space, UBI Pramerica (+€1.8bn) stood at the head of the table, followed by KBC (+€0.9bn), Aviva (+€0.9bn), Swisscanto (+€0.7bn), and State Street (+€0.6bn).
JP Morgan was also the leading promoter of mixed-asset funds in Europe (+€0.5bn), followed by Union Investment (+€0.4bn), Allianz (+€0.3bn), BNY Mellon (+€0.3bn) and Fidelity (+€0.2bn).
Nordea, which has gained considerable coverage for the recent soft closure of its popular Stable Return fund, was the leading promoter of alternatives funds for the month (+€1.7bn), followed by Flosbach von Storch (+€0.4bn), Amundi (+€0.3bn), Aviva (+€0.3bn), and Invesco (+€0.2bn).
Which funds proved popular?
In Europe the 10 best selling funds for August, excluding money market vehicles, gathered some €6.9bn of net sales (at the share-class level). They revealed that Europe is divided along regional lines when it comes to investing. Target maturity funds, for example, although occupying the table’s gold and silver positions, have drawn the majority of their flows from Italian and Spanish investors. Absolute return products on the other hand are proving particularly popular in the UK. This is despite some lacklustre performance overall for this product sector.
How is Brexit affecting the product development pipeline?
Compared to the US, the European mutual fund market has a considerably more complex mutual fund product range; there are some 35,000 Europe-based mutual funds compared to around 8,000 in the US.
One would think, then, that the European fund market might be ripe for consolidations. This may not be the case. With 463 newly launched products for Q2 2016, there has been a slightly higher number of newly issued products than for Q2 2015 (459). The number of liquidations went up 22 per cent compared with Q2 2015. Comparing the recent quarter’s closures with those of Q1 2016, the increase was even more significant (40 per cent) but not out of line with those of previous quarters.
The number of mergers went down 23 per cent between Q2 2015 and Q2 2016. Compared with Q1 2016, the difference was much smaller; there were only 4 per cent more mergers in Q2 2016 than in Q1 2016.
We are now three months after the Brexit vote, and the implications for fund product “passporting” are no clearer than the day after the vote. It is reasonable, however, to expect the number of products to rise over the course of the next two years. Fund managers based in the UK will want to ensure their access to the continental European market with the launch of products that are domiciled in the EU, while EU-based asset managers may start to launch funds that are domiciled in the UK. The first scenario is expected to lead to an even higher dominance of Luxembourg and Ireland as international fund hubs in Europe, while the latter may drive up the number of products domiciled in the UK.
Product development is often several years in the pipeline and lags flows. There have been some 220 funds registered for sale in the UK that launched in 2016. Approximately 30 per cent of these have been mixed asset funds. Comparatively, only 12 funds with an emerging market remit (new funds set to benefit from the flow trend established over the summer) have been launched.
Summer is over, Christmas is coming, and the final quarter of the year should prove to be an exciting one for the funds industry. All the monies that have flowed into money market vehicles over the summer will need a new home; so far, emerging markets holds the most favoured status. Fund groups will need to finalise product development plans for next year. The pressure is on for Brexit clarity, and the battle for domicile primacy is yet to be unleashed fully. The leader tables for year’s end will be most interesting indeed.
Jake Moeller is head of UK & Ireland research at Thomson Reuters Lipper