Industry trends towards leaner product ranges, rotation hard to detect – Accelerando briefing

Data on product consolidation and cross-border trade in mutual funds presented by Detlef Glow, head of EMEA Research at Lipper, and his colleague Ed Moisson, head of UK and Cross-Border Research at a briefing hosted by consultant Acclerando Associates points to a leaner European funds industry, but less certain evidence of a great rotation out of bonds.

Glow said that data from the past few years since the financial crisis struck in 2008 points to more merger and liquidations than new fund launches, resulting an a declining net number of funds in the universe of some 32,000 European funds.

From a sharp net fall of about 1,000 funds in 2008-9, through some recovery in 2010, the industry again contracted on a net basis in 2011-12. The high number of liquidations continued through 2012 points to an industry looking to clear out their ranges in favour of more profitable products.

Including exchange traded products there was a net increase in bond funds through the year, but excluding them would result in a net contraction. Last year (2012) the propensity to launch bond funds was highest in the first and fourth quarters, while for equity funds it was the reverse – liquidations were greater than launches through the first three quarters of the year.

There were a number of launches of mixed asset funds, but also a clearing out of poorly performing products, including mergers of products, in order to launch new products, Glow said.

However, there were very few new money market funds launched. Other types of funds saw high levels of liquidations, but often because of technical reasons, such as reaching payout dates. Merger levels were lower for other types of funds with particular strategies, because it is less easy to merge such products successfully, Glow said

And while there has been growing ‘noise’ around exchange traded products, particularly ETFS, Glos said it was important to keep their presence in perspective. ETFs in Europe are still less than 5% of the market. This could double over the coming five years, but would still represent less than €600bn in AUM. If they do grow, however, it creates more opportunity for managers chasing Alpha, he said

It is also the case that there is a large number of ETF products with small amounts of assets under management. Even in areas that are deemed popular, such as smart beta, while there may be a trend in launches, this is not necessarily reflected to an equal extent in terms of follow-up investments, or investors putting in more money beyond the seeding stage

The key themes Glow notes in the market currently include:

   – Active mangers going passive

   – Fund promotors teaming up with sales channel

   – Profitability of product ranges more in focus among owners of businesses

   – Public discussion on products or strategies, for example, discussion around speculation on soft commodities and food, which can result in pressure to change product ranges. Glow pointed to discussion last year on food prices, leading to banks to not do business in that space any more

   – ETFs will become available on retail platforms, where they are not currently. Promoters who were institutionally focused are looking to retail distribution.

Moisson, reviewing data on cross-border trade in mutual funds in Europe, said that 2012 was a pretty healthy year for the industry, which he defined as some 9,500 “true” cross-border funds out of a universe of some 35,000 products.
One trend noted in this trade since the financial crisis is that while banks may have become less interested in pushing out, by contrast independents are pushing their cross-border business.

Bonds have been a popular asset class among cross-border funds, but it is harder to tell if that is coming to an end through a “rotation” into other assets.
December and January data point to more flows into European equity on a net basis, Moisson said, but overall bonds funds are still pulling in more money. This reflects data from the US, where the start of the year saw equity funds pull in more money over the first month and a half of 2013, but where this trend has possibly stalled by mid-February.

Moisson also said he is cautious on whether the high yield story is over.
One area of key concern to fund selectors is emerging market debt. Half of EMD funds in Europe launched in the past three years. This is important in terms of the quant screens used by fund selectors. And with the three year track record in place, it is leading to teams of EMD specialists being lifted out of management firms by competitors.

The most successful funds continue to take a larger share of the market than they did a decade ago, but other data points to this status quo becoming harder to maintain when sales are compared on a net inflow basis.

One piece of evidence from the UK market suggests that funds that do well over a one-year period tend to get the biggest inflows in the following year. This is even more so for funds with the best three-year record, but less so for those with five and 10-year records. Thus over time it becomes increasingly important to do well over a one-year period to ensure inflows continue, Moisson suggested.

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