May 2013

INSIDE VIEW: Bonds take in lion’s share

LionFixed income funds were dominant in 2012, while equities suffered net outflows and money market funds lost their appeal. The global fund distribution team at Ernst & Young Luxembourg present the numbers. Although the macroeconomic environment was challenging in 2012, the European Central Bank’s policy measures and general commitment to do “whatever it takes” to save the euro helped sustain demand. Progress in reducing fiscal imbalances and strengthening governance of the eurozone supported investor confidence, resulting in a surge in demand for long-term Ucits funds in 2012 with sales of €205 billion, compared with net outflows of €58.6 billion in 2011. Money market funds, meanwhile, continued to suffer because of low interest rates and strong competition from bank deposits. If the €40.5 billion of redemptions from money market funds are included, the European industry’s net inflows were €164 billion in 2012. Fixed income funds made up the lion’s share of long-term funds sales, with investors pouring €178 billion into bond funds, eclipsing the €6.8 billion net outflows recorded by equity funds over the year. High yield bond funds and emerging market debt funds together accounted for 40% of the net flows into fixed income. This pronounced appetite for fixed income is evidence that investors remained risk-averse about the economic outlook. Sales of fixed income funds remained strong in December at €19.4 billion, above their monthly average for 2012. Sales of equity funds were bleak for most of 2012 before bouncing back in the last three months of the year with net inflows of €13.7 billion from October to December and a peak of €7 billion in December. When investing in equities, investors went for global emerging market equity funds which recorded net inflows of €18.5 billion in 2012. The positive trend in equity fund sales continued with good inflows for the first three months of 2013. As is often the case in uncertain times, allocation funds remained appealing to investors thanks to their multi-asset nature. Mixed-asset vehicles enjoyed €29.7 billion in net new subscriptions with flexible funds catching the biggest portion. Net sales of non-Ucits funds increased in 2012 to reach €139 billion, up from €99 billion in 2011, according to the European Fund and Asset Management Association Fact Book 2012. Institutional funds benefited from €112 billion in net new money in 2012 thanks to pension schemes, insurance companies and other institutional investors continuing to invest the contributions of their members into those funds. CROSS-BORDER FUNDS ‘RULE’
Long-term cross-border funds, defined as vehicles that generate more than 20% of their sales from a secondary distribution market, attracted a whopping €220 billion in net inflows in 2012. Cross-border funds grew in number by 11% and cross-border registrations by 10% in 2012. Thus, cross-border funds now account for more than 45% of the European fund industry assets under management. Luxembourg and Ireland reinforced their hegemony over the cross-border Ucits market with a combined market share, based on assets under management, of 47% at the end 2012, up from 45% a year earlier. Net sales of Luxembourg and Ireland-domiciled Ucits funds accounted for more than 90% of total Ucits net sales in 2012. The cross-border industry continues to grow thanks to long-term organic and structural factors, with cross-border asset management groups aiming to rationalise their product ranges and distribution strategies while expanding their investor base. EVOLUTION OF CHANNELS
The way funds are sold is changing at a European level because of regulations such as Ucits IV, MiFID II, the Retail Distribution Review in the UK, the ban on the receipt or payment of inducements in relation to new sales of financial products in the Netherlands, and the Swiss Federal Court ruling that retrocessions received by banks for asset management services belong to clients. With an overall 70% market share at the end of 2012, retail and private banks remain the predominant distribution channels in Europe. However, their market share has fallen from about 90% in 1995, and will continue to shrink as other distribution channels emerge, such as independent finacial advisor (IFA)­ platforms and fund supermarkets. It is interesting that some of the most bank-dominated distribution markets such as France are opening to IFAs and fund platforms. The distribution model is continuously evolving with the emergence of the kind of guided architecture dominant in Germany, where banks distribute their own funds as well as funds from selected third-party managers in answer to the growing market share of IFAs. Banks will continue to be the biggest distribution channel in 2013 and the foreseeable future, but alternative channels such as insurance companies, fund supermarkets and IFAs are rising in importance. THE YEAR AHEAD
So far in 2013, investor confidence has risen sharply and appetite for risk has increased as threats such as the European sovereign debt crisis have been seen to diminish. Appetite has been focused on global and emerging market equity funds, which recorded the highest inflows. This return to equity funds is a testament to investors’ increasing willingness to take risks. By contrast, strong fixed income fund sales are a sign of persistent cautiousness. Equity fund sales are likely to continue to increase this year, seeming to confirm the prediction of a “great rotation”. The rotation is unlikely to be swift considering the scale of inflows into more risky segments of the bond fund market. Mathieu Volckrick, Laurent Denayer and Rafael Aguilera are part of the Global Fund Distribution team at Ernst & Young Luxembourg
(Ernst & Young’s fund flow analysis is based on Morningstar data unless otherwise stated) Bonds box ©2013 funds europe

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