For European equity funds, the new year opened against the trend of 2016. According to Morningstar statistics, net flows in January amounted to 3,36 billion euros. The largest share (2,75 billion) is in actively managed funds. Last year, the latter had finished with heavy net redemptions and much of the funding had gone into indexed products.
Can we talk about a return to assets? In fact, it's premature. If we add the 61 billion of equity ETFs (Exchange Traded Funds) to the 6,9 million that flowed into index funds, we understand how the passive component continues to play an important role in investor choices.
THE TURNING POINT OF 2016
For the European fund industry, 2016 was a year of changing relationships between the two approaches to management. Net flows in indexed funds amounted to 77 billion (the figure includes ETFs), against 45 billion in actively managed funds. The market share of the former within the universe of long-term funds (excluding money market funds) grew to 15,1% from 13,8% at the end of 2015. The increase for equity segments alone is even more significant : at the end of 2016 they represented 25% of total assets allocated to equity products. The most significant portion is in the hands of ETFs, while unlisted index funds are still a niche.
THE ROAD IS STILL LONG
Analyzing trends in European industry reveals a more complex picture than a simple move towards the passive approach. “Index fund assets tend to grow every year, while flows into assets are much more volatile,” explain Ali Masarwah and Matias Möttölä of Morningstar's research team, in their January Asset Flow Report. “The latter may still outperform passive funds in the growth phases of the market because they have a larger asset base. While the indexed recorded in their record year (2015) 99 billion euros of net flows; the active ones closed their golden period (2014) with net subscriptions of 370 billion, a much higher sum”.
USE LOW COST
In the United States, the trend was more pronounced. In 2016, index funds had net flows of $504,8 billion, surpassing the 2014 record (422,7) and the 2015 result (418,5). Conversely, the active segments closed with net redemptions of 340,1 billion, which add up to the -230,5 billion of the previous year.
Source: Morningstar Direct. Data as at 31 December 2016.
The main culprits are specialty equity funds on the US Stock Exchange, which haven't had a year of positive net inflows since 2005. "The difficulty of active managers to beat the benchmark is the primary reason for these outflows," explains Tom Lauricella, editor of Morningstar . “But the cost factor is also important. By dividing the funds into quintiles based on the expense ratio, we have seen that the rate of organic de-growth of funds (flows as a percentage of initial assets, Ed.) is higher for the more expensive ones and in the last two years there has been a acceleration of the trend”.
THE LEAD OF VANGUARD
This trend is changing the industry landscape in the United States, with repercussions for the rest of the world. Vanguard, a leader in low-cost investing, raised 289 billion dollars worldwide in 2016 (of which 277 in the US), a sum that is higher than the total flows of other investment houses (244 billion). Morningstar analysts are convinced that the low costs of its products are the key to its success, as various studies have shown that this factor is the best indicator of a fund's future results.
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Source: Morningstar.it
