Morningstar Direct SM Asset Flows Commentary: Europe

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1 October 2017 Data through September 30 Morningstar Direct SM Asset Flows Commentary: Europe Inflows to allocation and alternative funds falter in September By Ali Masarwah, Director, EMEA Editorial Research After witnessing flagging demand in August, net sales of long-term funds slowed down further in September. European-domiciled open-end funds had net subscriptions of EUR 36.1 billion, the lowest level seen in a one-month period since January This went back to receding inflows to allocation and alternative funds, which have been the bedrock of fund distribution in Europe since the financial crisis Allocation funds took in EUR 6.5 billion of net new money in September, the lowest level seen since December Sales of alternative funds, which implement hedge fund strategies in the wrapper of regulated funds, dropped to a mere EUR 104 million, thus making September the worst month since November 2016 (when these funds bled EUR 790 million). Despite the waning demand in the past few months, by and large, 2017 is still evolving to be an exceptionally good year for Europe s fund industry, thanks to the substantial inflows in the first six months. Inflows to long-term funds stand at EUR 450 billion for the year to date, more than fourfold last year s levels. Thanks to buoyant markets in , assets under management in European long-term funds took a leap from EUR 6.59 trillion as of September 2016 to EUR 7.49 one year later. Equity fund sales of EUR 9.0 billion were driven by demand for actively managed funds, which enjoyed the second-highest one-month net inflows--eur 7.7 billion--this year. Conversely, open-end equity index funds took in a relatively modest EUR 1.4 billion in September, the second-lowest level of inflows this year. (Equity exchange-traded funds, which are not part of this statistic, added another EUR 5.7 billion to the tally of equity index funds.) Inflows to actively managed equity funds have by far outpaced passive equity funds sales in the third quarter EUR 21.0 billion vs EUR 8.9 billion. For the year-todate, however, European passive equity funds have outpaced actively managed equity funds in absolute turns, raking in EUR 42.9 billion against the EUR 39.0 billion which targeted actively managed funds. When using the organic growth rate as a measure of success, defined as flows percentage of beginning assets, passive open-end equity funds have clearly outpaced their active pendants. While fixed-income funds enjoyed the highest level of inflows among all long-term fund groups, net inflows of EUR 20.2 billion were the lowest level since January Below-average demand for seniorloan and other higher-yielding bond funds (grouped together in the other bond category) and outflows from several high-yield bond categories damped net sales of Europe-domiciled fixed-income funds. Money market funds attracted EUR 22.1 billion of net inflows on the back of high subscriptions of Ireland-domiciled products. Conversely, French and Luxemburg- domiciled money market funds witnessed high outflows.

2 Flows by Global Broad Category Group (Open-End Funds) Net Assets (EUR Market Share % Estimated Net Flow (EUR Mil) Name Mo YTD 1 Year YTD Allocation 1, , , , Alternative ,685 40, Commodities (24) 933 1, Convertibles (131) 277 (554) 0.44 Equity 3, ,012 81,902 82, Fixed Income 2, , , , Property ,170 5, Miscellaneous (133) 473 2, Unclassified (32) 237 1, All Long Term 7, , , , Money Market 1, , , , Total 8, , , ,172 Fund-Level Categories: Largest Inflows Global flexible-bond funds were the top-selling Morningstar Category in September. This goes back to the continuous demand for PIMCO GIS Income. Counting out the PIMCO fund, all other funds of this category combined saw negative net flows. Global emerging-markets bond funds continued to see strong demand, garnering inflows of EUR 3.6 billion, the second-highest level seen thus far this year. The main beneficiaries on a company level were Franklin Templeton, Aegon, and Ashmore. Global-bond funds enjoyed the strongest inflows since May State Street led the pack thanks to inflows sent to its index funds, followed by T. Rowe Price and Mercer. (This turn of a friendly page also goes back to reduced outflows from funds offered by Franklin Templeton, KBC and Schroders.) Net subscriptions of Japan large-cap funds hit a 30-month high, and demand for eurozone equity funds was the strongest since October This arguably reflects investors rising optimism for two regions that combine growth and relatively attractive valuations. Fund-Level Categories: Largest Inflows (Excluding Money Market Funds) Global Flexible Bond--USD Hedged 90 4,304 34,620 36, Global Emerging-Markets Bond 128 3,584 25,092 23, Global Bond 136 2,190 9,395 6, Other Bond 165 2,152 33,980 39, Eurozone Large-Cap Equity 107 1,367 4,607 6, USD Flexible Bond 30 1,243 6,347 5, Global Emerging-Markets Bond--Local Currency 74 1,188 14,142 13, USD Moderate Allocation 76 1,152 13,576 13, Japan Large-Cap Equity 79 1,043 1,936 2, EUR Flexible Allocation--Global 126 1,030 16,884 20,

3 Fund-Level Categories: Largest Outflows Outflows from Europe large-cap equity funds continued unabated. Among the companies impacted the most were Danske Invest, Candriam, and MFS. Euro government-bond funds suffered yet another month of outflows. These funds have only seen five positive months of inflows since the European Central Bank kicked off its massive quantitative-easing program in March While bond prices have risen, the return perspectives of euro government bonds are meagre. Funds from Amundi, Deutsche Asset Management, and Fideuram suffered the highest outflows. Alternative global-macro funds suffered outflows of EUR 900 million, which represents more than 5% of this category s assets at the beginning of the month. Natixis, UBP, and Morgan Stanley bore the brunt of net redemptions. Fund-Level Categories: Largest Outflows (Excluding Money Market Funds) Europe Large-Cap Blend Equity 171 (1,136) (4,534) (9,061) (2.84) EUR Government Bond 71 (1,019) (4,460) (10,167) (5.85) Alt--Global Macro 16 (904) (56) (774) (0.35) EUR Ultra Short-Term Bond 103 (809) 10,361 13, USD High-Yield Bond 70 (752) (2,588) (2,499) (3.45) UK Equity Income 92 (616) (4,797) (5,927) (5.02) USD Corporate Bond 36 (574) 314 (1,023) 0.84 Europe High-Yield Bond 14 (377) (1,240) (735) (8.14) Switzerland Large-Cap Equity 57 (362) (1,985) (774) (3.72) EUR Bond--Long Term 12 (339) (1,351) (1,498) (9.64) Fund Providers: Largest Inflows PIMCO continued to lead the inflows by provider thanks to EUR 4.3 billion sent to GIS Income. By now, this flexible-bond fund boasts assets of EUR 50.1 billion, which account for 37% of the assets managed in PIMCO s European open-end fund range. PIMCO GIS Global Investment Grade Credit pulled in EUR 410 million, and inflows of EUR 240 million made PIMCO GIS Global Libor Plus Bond the third-best selling PIMCO fund in Europe in September. BlackRock garnered the second-highest inflows in September with bond funds taking in EUR 1.6 billion, most of which targeted emerging-markets local-currency bond funds. Germany s Union Investment thrived on the distribution of institutional bond funds and on the distribution of allocation funds to retail clients of the cooperative banks--the owners of the fund management company. Eurizon, the asset manager of Italy s Intesa Sanpaolo, continued to thrive on the distribution of flexibleallocation, capital-protected, and fixed-term bond funds.

4 Fund Providers: Largest Inflows (Excluding Money Market Funds) PIMCO 134 5,281 41,113 42, BlackRock 317 3,022 52,395 50, Union Investment 150 1,524 10,341 12, Eurizon 136 1,204 14,568 18, AEGON 18 1,143 2,529 6, Allianz Global Investors 118 1,085 12,255 13, Deutsche Asset Management ,477 4, AB (AllianceBernstein) ,500 9, Mercer Global Investments ,952 8, Invesco ,886 12, Fund Providers: Largest Outflows Magellan Group suffered the highest outflows because of heavy redemptions from MFG Global, an alternative global-macro fund. AXA s European open-end funds shed EUR 850 million, most of which exited high-yield bond funds. The lion s share of Standard Life s outflows stemmed from its alternative Global Absolute Return Strategies (GARS) offerings, which have suffered 17 consecutive months of outflows. In the past 12 months, SLI s multistrategy funds have lost 20% of beginning assets to outflows. Redemptions of Carmignac fund shares, for once, were not concentrated on its allocation flagship Carmignac Patrimoine (which was, nonetheless, also net-flow negative). Instead, the company s outflows were focused on Carmignac Sécurité, a diversified short-term bond fund, which shed net EUR 430 million. Fund Providers: Largest Outflows (Excluding Money Market Funds) Magellan Group 1 (948) (1,093) (194) (43.96) AXA 87 (846) (2,037) (1,736) (2.32) Standard Life 78 (839) (5,071) (8,482) (6.13) Carmignac 56 (610) 3,556 4, Shenkman Capital 1 (578) (1,133) (1,261) (45.81) Kairos 6 (541) Woodford 11 (482) Danske Invest 50 (422) (2,807) (1,683) (5.44) BNP Paribas 112 (402) 2,661 2, La Caixa 27 (381) 1,825 3,

5 The Largest Open-End Funds Turning to Europe s largest open-end funds, PIMCO GIS Income continued to feed on investors desperate chase for yield. September inflows of EUR 4.3 billion were the highest ever sent to this fund in a one-month period. This fund, which boasts a Morningstar Analyst Rating of Silver, opened in 2012 and mirrors the US-domiciled version of the strategy, which has a longer history. While its successful track record was built on the heavy exposure to US nonresidential mortgage-backed securities, the strategy is now more heavily focused on non-us developed and emerging-markets debt, including corporate bonds. As of Sept. 30, the two funds had combined assets of EUR 133 billion. Bronze-rated JPMorgan Global Income, a moderate-allocation fund, enjoyed another month of stellar inflows in September, as did Silver-rated M&G Optimal Income, which posted its 10th consecutive month of net inflows after seeing heavy outflows for the better part of 2015 and Investors have flocked back to this defensively positioned fund, which fared well during the fall of 2016 when bond yields spiked. The U.K.-domiciled version of Standard Life Investments Global Absolute Return Strategies suffered the highest outflows among Europe s largest long-term funds. 10 Largest Long-Term Funds by Net Assets PIMCO GIS Income ,335 31,107 33, AP7 Aktiefond (8) 933 2, SLI Global Abs Ret Strat (636) (4,558) (5,537) (15.09) Carmignac Patrimoine (197) (695) (729) (2.86) M&G Optimal Income ,396 4, JPM Global Income ,373 4, AB FCP I Global High Yield Portfolio ,288 4, DWS Top Dividende ,057 1, Nordea 1 - Stable Return (188) (562) (1,344) (3.05) Templeton Global Total Return (732) 4.05 To learn more about Morningstar Direct Asset Flows. visit us at this link. Data Notes The figures in this report were compiled on Oct. 30, Approximately 27,000 of 31,000 funds that Morningstar tracks from over 1,700 fund companies across over 30 domiciles are included. Organic growth rate is flows as a percentage of beginning assets.