What a difference a year makes. In January last year European asset managers could happily look forward to a year of strong sales flows. Retail clients, after their extended post-financial-crisis absence were back in the game. Low interest rates had worked their magic, finally forcing retail clients out of their deposit account comfort zone. And, for the first four months, long-term sales volumes set a succession of new records that proved the point and added to industry euphoria. By the end of April managers could look back on the best four-month period they had ever achieved and the experience was both broad and deep. Sadly, it was also rather short-lived and as this new year dawned, only the foolish or madly optimistic could expect a repeat of those recent successes.
Signs of challenging times to come have been building over the last six months. Against a background of unsettling macroeconomic data, fund flows began to crumble. According to Broadridge data, a first-half tally of nearly €230bn turned into a second half that looks unlikely to deliver more than €35bn*. More interesting though, and more worrying, is evidence that the smart money (institutions) started to withdraw from the middle of the year, or at least de-risk exposure. Meanwhile, retail investors continued to pump money into funds.
In the absence of data on exactly who is buying or selling what types of fund, the best indicator of this changing dynamic is the money market sector; since June 2015, €92bn was placed in money market funds, of which 66% went into funds established solely for institutions. The scale of these moves is even more profound when you take into account the fact that since 2008 the sector has been in a severe state of redemption depression, which only really began to lift this year. Rock-bottom returns were the cause but their continued paucity is no longer a barrier in the search of a safe haven.
At the same time funds of funds, one of the best indicators of retail engagement, saw inflows of €12bn during the second half of the year and mixed asset funds, another good indicator, enjoyed inflows of €50bn. These retail volumes came off the boil as the year wore on but money continued to roll in.
The retail energy was even more obvious amongst the captive bank channels. European industry professionals would generally agree that, excluding the UK, Europe’s large captive funds have a strong bias towards mainstream retail savers. Their mixed asset funds were the most successful in the second half of last year, producing net sales of around €4bn–€6bn per month, even during August and September when the market as a whole slumped into redemption.
It’s hard to know the truth behind the numbers but there are some warning signs that asset managers should be watching. Retail investors were caught out once by the dotcom boom and bust of 2000, and then again by the sub-prime and banking crisis of 2007. Mixed asset funds, many cloaked in absolute return promises, have proved to be an extraordinarily effective carrot with which to entice wary retail investors. But will these funds prove able to deliver their promises of stable returns and/or limited downside in the somewhat bleak and volatile market phase that we are now in? Possibly, belief in Mario Draghi’s largess will sustain investors’ commitment but 2016 looks set to be a testing time for retail investors, and fund promoters need to be very careful not to disappoint.
*Source: Broadridge FundFile, Long-term funds, excluding funds of funds. Data to November 2015.