Posted inFRENELUX

2020 not as bad for European managers as it could have been

It could have been a disastrous year for the European fund management industry, but policymakers rode to its rescue.

Huge fiscal and monetary stimulus packages supported markets and continued to push investors away from cash. In the end, the industry ended the year close to where it began, but this headline figure masked considerable variation underneath.

The European fund industry had €10.03trn (exc. Money market funds) as at 30 November 2020 according to Morningstar data, an organic growth rate of 3.2%.

In aggregate, fixed income saw the strongest inflows, at €110bn, in spite of continued low yields.

Equity funds saw inflows of €91.7bn, while allocation funds saw inflows of €34.8bn.

The notable weak spot was in alternatives, which saw €35.5bn exit the sector – a combination of the weakness of the property sector and a growing disillusionment with the poor performance and high fees from hedge fund strategies.

Commodities had a good year, drawing in an extra net €1.6bn of assets.

Swings and roundabouts

However, this overall picture masked huge shifts in the popularity of different asset classes through the year as economic news and investor sentiment ebbed and flowed.

In November, for example, equity funds were firmly in the ascendancy as vaccine news emerged and some stability returned to US politics.

At €63.4bn, equity funds drew around 8x the inflows of bond funds (€7.6bn).

It was a similarly variable picture for commodities funds: gold funds were riding high from March to June when risk aversion was its height, but more cyclical commodities came back in the second half of the year.

Equally, within fixed income, sentiment flip-flopped for much of the year.

Corporate bonds attracted considerable inflows in the first half of 2020 as investors realised historically wide spreads represented a significant opportunity.

However, by the back end of the year, those spreads had narrowed and yields no longer looked appealing. There was more appetite for areas such as emerging market bonds.

It was a similar picture in the ETF market. According to Amundi’s ETF flows report, inflows into European-registered equity ETFs jumped six-fold from October to November, with flows into ETFs languishing.

Compare this to the situation in May, when investors continue to shift from equity to fixed income: equity ETFs saw outflows of €4.2bn, while fixed income ETFs gained €33.5bn.

Within equities, global funds and those weighted to the top-performing technology companies found favour with investors.

Green growth

However, perhaps the most notable trend was the push towards sustainable investment.

This was supported by strong performance: Fidelity’s Putting Sustainability to the Test report, released in November, showed those companies at the top of its ESG rating scale outperformed those with weaker ratings in every month from January to September, apart from April.

The aggregate performance difference was stark: stocks with the lowest rating dipped by an average of 23%, while those with positive ratings gained an average of 0.4%.

This was also reflected in the ETF market where energy transition and similar products did well.

The iShares Global Clean Energy fund, for example, grew to $5.6bn, rising 134.7% over the year. This has been supported by government spending promises on clean energy as well as the imminent Sustainable Finance Disclosure Regulation (SFDR), due to come into effect in March 2021.

The SFDR imposes new transparency and reporting obligations on investment management firms, both at a firm-wide level and at a product level.

It looks set to tackle the problem of ‘greenwashing’ within the investment industry and ensure transparency.

Equally, progress was made on the EU’s ESG taxonomy during the year.

By the end of 2021, investment groups offering funds in the EU will need to show how they have used the taxonomy to determine the sustainability of underlying investments.

Fund groups have been scrambling to ensure their products meet these new requirements.

This has involved some new launches, but also shifting existing products onto an ESG framework.

A recent report by PWC suggests that assets in sustainable investment products could reach €7.6trn over the next five years and outnumber conventional funds.

On the ETF side, in July the European Commission publish the delegated act of climate-related benchmarks, making this an officially recognised index series.

This prompted a slew of climate-related ETF launches.

Loss of Britain a gain for some EU states?

Brexit has remained an issue for asset managers for much of the year, though it ended on a flat note as the EU-UK trade deal conspicuously left out financial services, with a limited admission from prime minister Boris Johnson that the deal “perhaps does not go as far as we would like” for this important segment of the UK economy.

The investment management industry will need to wait on issues such as delegated framework.

In the meantime, UK investment managers continue to set up in Europe to ensure they retain passporting arrangements: M&G, Janus Henderson and Fidelity have already set up in Luxembourg, for example.

The key will be whether Luxembourg and Ireland can convert their status as successful fund administration hubs for UK asset managers to homes for managing assets directly.

Luxembourg is already making headway, establishing itself as a leading alternative investment fund hub  – its private debt industry grew 36.2% in 2020.

As it stands, Luxembourg has around a quarter of the region’s funds, with Ireland next in line.

France, Germany and the UK have similar market share, with Spain and Italy attracting just 1.8% and 1.9% respectively.

Nevertheless, this could see some flux in the year ahead.

For the European fund management industry, 2020 was not as awful as it might have been.

Monetary and fiscal policy has supported markets and fund flows have held up.

Asset managers will be hoping they can repeat the trick in 2021.

Part of the Bonhill Group.