2017 Global Asset Flows Report Flows set new record in 2017; fixed income is still in favor.

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1 2017 Global Asset Flows Report Flows set new record in 2017; fixed income is still in favor. Morningstar Research 16 May 2018 Data through Dec. 31, 2017 Worldwide Open-End Mutual Funds and Exchange-Traded Products Kevin McDevitt, CFA Senior Analyst Manager Research Alina Lamy Senior Analyst Quantitative Research Executive Summary Global net flows reached nearly $2 trillion ($1.97 trillion) in 2017, led by nearly $800 billion in estimated U.S. flows and an estimated $642 billion in cross-border flows. This total more than doubled 2016 s $835 billion in estimated flows. Indeed, after total flows fell in both 2015 and 2016 year over year, 2017 saw the largest inflows in a decade. The robust flows in 2017 likely benefited from a favorable environment across global capital markets. Equities gained about 24% (in U.S. dollars) as measured by the MSCI All-Country World Index. Emerging markets, led by India and China, did particularly well, with the MSCI Emerging Markets Index returning 37.3%. Despite the U.S. Federal Reserve raising rates several times, long-term interest rates overall did not change much during the year. Vanguard and BlackRock continued to dominate inflows among fund families. BlackRock led the industry with about $400 billion in inflows, thanks largely to its ishares exchange-traded funds. BlackRock funds took in about $160 billion, while ishares ETFs absorbed more than $240 billion. BlackRock edged Vanguard s haul of close to $385 billion. In terms of asset classes, 2017 s rebound in flows was driven by equity and fixed income. Fixed income garnered the greatest flows with an estimated $830 billion. Equity funds followed with an estimated $580 billion, and allocation funds collected about $190 billion. What was striking about fixed-income flows was that they also showed the second-largest organic growth at 12.6%; only alternative funds showed greater organic growth at 13.4%. Equity demand rebounded in 2017 after tepid inflows of $17 billion in With global equity markets soaring in 2017, demand roared back. Asia, the only major region with equity inflows in 2016 at about $48 billion, took in another $72 billion in The United States showed the greatest rebound. After shunning stock funds in 2016, U.S. investors directed nearly $300 billion into equity funds in About $240 billion of these flows went to non-u.s. equity funds. Passive equity funds continued to take market share from their active counterparts across the board. However, when it came to passive fixed-income funds, the U.S. was the only market in which they grew their market share.

2 Page 2 of 17 Basis of Data in This Report This report analyzes the flows that investors placed in global open-end funds and exchange-traded products in 2017 and what these trends reveal about past performance, as well as investor behavior and expectations going forward. Total Flows More Than Doubled Compared With 2016; Total Assets Also Increased Global net flows reached $1.97 trillion in 2017, led by nearly $800 billion in estimated U.S. flows and an estimated $642 billion in cross-border (multiple-domicile) flows. This total more than doubled 2016 s $835 billion in estimated flows. Indeed, after total flows fell in both 2015 and 2016 year over year, 2017 saw the largest inflows in a decade. Exhibit 1 Net Flows and Assets by Geographic Region of Domicile, USD billion The robust flows in 2017 likely benefited from a favorable environment across capital markets. Global equities gained about 24% (in U.S. dollars) as measured by the MSCI ACWI. Emerging markets, led by India and China, did particularly well, with the MSCI Emerging Markets Index returning 37.3%. Despite the Federal Reserve raising rates several times, long-term interest rates overall did not change much during the year. Thanks as well to solid economic growth and a benign credit environment, bond funds generally notched healthy gains, with the average world-bond vehicle returning 6.9% and emergingmarkets offerings leading the way among bond funds overall. All tables and charts include mutual funds and ETPs but exclude funds of funds. Assets and flows in USD billion unless specified otherwise. Only funds that existed on Dec. 31, 2017 were included in the data throughout this report.

3 Page 3 of 17 There was a notable divergence between the flows for cross-border and Europe compared with In 2016, they were fairly aligned; cross-border flows were $165 billion versus $126 billion in Europe. In 2017, cross-border flows were 2.6 times greater than in Europe. Cross-border flows also saw impressive 13.0% organic growth rate, more than twice Europe s 6.1%. Cross-border organic growth was second only to the 20.6% of the "other" Europe region, which includes Bulgaria, Latvia, Lithuania, Malta, Romania, the Russian Federation, San Marino, and Slovenia. Growth was also strong across emerging markets, with 10.1% growth in Asia and 8.1% in Latin America. Exhibit Organic Growth Rate by Region Fixed Income Remained the Most Popular Category Group in 2017 In terms of asset classes, 2017 s rebound in flows was driven by equity and fixed income. Fixed income garnered the greatest flows with an estimated $830 billion. Equity funds followed with an estimated $582 billion, and allocation funds collected about $190 billion. That robust showing from allocation funds was somewhat surprising considering that in the U.S. those vehicles had about $19 billion in outflows. Most of allocation's net cash flows came from cross-border and Europe-domiciled funds, with about $150 billion in combined inflows.

4 Page 4 of 17 Exhibit 3 Net Flows and Assets by Global Category Group, USD billion The Total rows may not add up because of the Unclassified category group, not depicted in this table. What was striking about fixed-income flows was that they also showed the second-largest organic growth at 12.6%; only alternative funds showed greater organic growth of 13.4%. It's rare to see such high growth at scale. This speaks to the continuing investor appetite for fixed income, despite stubbornly low interest rates. The greatest demand came from the U.S., with nearly $390 billion in fixed-income inflows, followed by Europe and cross-border. The enduring attraction of fixed-income holdings likely owes in part to demographic trends, with populations aging globally. Those nearing the end of their working lives likely value the perceived safety of bonds as well as the income stream. It may also signal an interest in maintaining a balanced portfolio in the face of rising equity prices. Exhibit Organic Growth Rate by Global Category Group

5 Page 5 of 17 Within the U.S., investors showed the greatest demand for intermediate-term bond funds, which tend to be core holdings. Meanwhile, U.S. investors pulled about $23 billion from high-yield bond funds, even though such funds gained 6.5% on average in Investors may still be smarting from the drubbing high-yield bonds took during the correction. Indeed, the demand for intermediate-term bond funds and outflows from high yield showed greater risk aversion among U.S. fixed-income investors, at least when it comes to credit risk. Exhibit Estimated Net Flows by Region and Category Group, USD billion Thanks to their strong growth, alternative funds reached nearly $900 billion in assets in 2017, placing fifth among major asset classes but still significantly behind allocation funds' $3.9 trillion in assets. The bulk of the demand for alternatives came through cross-border, Europe, and Latin America funds in 2017, with more than $80 billion in inflows between the three. U.S. investors largely lost their taste for such vehicles. Demand peaked in 2013 when investors contributed $53 billion to alternative funds. But in 2017, U.S. investors funneled just $7 billion to that group. Equity demand rebounded in 2017 after tepid inflows of about $17 billion in With global equity markets soaring in 2017, demand bounced back. Asia, the only major region with equity inflows in 2016 at about $48 billion, sustained its interest in equities with $72 billion in inflows. The U.S. showed the greatest rebound. After slight equity outflows in 2016, U.S. investors directed nearly $300 billion into equity funds. What s notable, however, is that about $240 billion of these flows went to non-u.s. equity funds, rather than U.S.-focused vehicles. That may owe to the fact that while the S&P 500 gained nearly 22%, markets outside the U.S. generally did even better, with the MSCI ACWI returning 27.2%. Europebased equity funds collected about $135 billion in inflows, while cross-border equity funds received about $53 billion.

6 Page 6 of 17 The equity resurgence in 2017 was led by global equity large-cap and emerging-markets equity funds, which collected about $215 billion and $80 billion, respectively. This year-over-year surge perhaps wasn t too surprising given the robust performance of equities globally and emerging markets in particular. Exhibit 6 Global Category Leaders, USD billion Meanwhile, U.S. equity large-cap blend funds took in nearly $110 billion. This is notable when compared with the nearly $75 billion in combined outflows from U.S. equity large-cap growth and U.S. equity large-cap value funds, the greatest outflows among global Morningstar Categories. Steady outflows are an old story for large-growth U.S. equity funds but remain surprising given the excellent results from that part of the market. The typical U.S. large-growth fund gained 27.7% in 2017, significantly better than the S&P 500 s 21.8%. (U.S. large-value funds didn't fare nearly as well, with an average gain of 15.9%.) Overall, the outflows from these two categories could signal a slight shift away from style-based investing, at least at the margin. Exhibit 7 Global Category Laggards, USD billion

7 Page 7 of 17 Looking Back: Growth in Assets Over Time; Historical Flows Exhibit 8 illustrates the growth in assets over time. Global assets surpassed $30 trillion, a new record, by the end of After the dip in (during the global financial crisis), the industry was able to recover, albeit with a few bumps in the road. In terms of category groups, equity remains the largest, followed by fixed income and allocation. Exhibit 8 Assets by Global Category Group Exhibit 9 Annual Flows by Global Category Group

8 Page 8 of 17 Looking at annual flows historically hints that investors are not as good at market-timing as they may think. In 2007, flows into all category groups were positive. In 2008, when the financial crisis hit, investors panicked en masse and rushed to take their money out; most category groups sustained outflows. And when investors started to return, the largest flows went to bond funds, even though that would probably have been the best time to take advantage of the stock market recovery. Investors didn't regain confidence in stocks until 2013, but even that was somewhat short-lived, as equity inflows declined over the next three years. Monthly flows can vary widely in some years, but not so in The monthly flow pattern remained fairly consistent, emphasizing investors' marked preference for fixed income and non-u.s. equity. Exhibit Estimated Net Flows, Monthly, by Category Group

9 Page 9 of 17 Fund Families: BlackRock and Vanguard Dominate Among fund families, BlackRock led the industry with about $400 billion in inflows, thanks largely to its ishares ETFs. BlackRock funds took in about $160 billion, while ishares ETFs gathered more than $240 billion. BlackRock edged Vanguard s haul of close to $385 billion. Exhibit 11 Largest Fund Firms by Assets Under Management, USD billion These two behemoths continued to grow at the expense of their competitors. Vanguard and BlackRock held a combined $7.5 trillion in mutual fund and ETF assets at the end of That's nearly equal to the $7.9 trillion of assets managed by their eight largest competitors combined. Among that group, only PIMCO reached $100 billion in inflows (after modest outflows in 2016), followed by Amundi s nearly $60 billion. Meanwhile, both T. Rowe Price and Franklin Templeton had outflows, marking the second consecutive year of outflows for T. Rowe Price and the third consecutive year for Franklin Templeton. Passive Equity Funds' Popularity Continues Growing Both equity and fixed-income passive funds continued to take market share from their active counterparts. Among equity funds, passive offerings continued their steady climb in both the U.S. and Europe. Nearly 45% of U.S. equity assets are now in passive vehicles and one third of equity assets in Europe are in passive funds.

10 Page 10 of 17 Exhibit 12 Percentage of Assets in Active Versus Passive Funds by Region The most dramatic growth in passive share has been in Asia. In mid-2010, passive equity funds in Asia claimed just 17.5% of total fund assets, less than the 19.5% in Europe and 26.3% in the U.S. But investors have embraced passive funds at a greater rate ever since. In 2017, market share for passive equity funds in Asia eclipsed the U.S. at 47.6%. Note, however, that some of this growth was fueled by the Japanese central bank buying local exchange-traded products. Investors in Asia have less enthusiasm for passive fixed-income funds, where market share is just 9.5%. In fact, fixed-income market share fell from a peak of 11.3% in June It s a somewhat similar story in Europe, where growth in fixed-income market share for passive funds has stalled. It peaked at 18.7% in March 2017 but dropped slightly to 18.3% by year-end. In fact, the U.S. is the only major fixed-income market where passive market share growth remained steady, hitting 30.0% by year-end.

11 Page 11 of 17 Exhibit 13 Percentage of Assets in Passive Funds, Equity Exhibit 14 Percentage of Assets in Passive Funds, Fixed Income In terms of flows, investors preferred passive equity vehicles across regions, with cross-border flows a slight exception. In fact, largely because of U.S. outflows, investors withdrew nearly $80 billion globally from actively managed equity funds. U.S. investors poured $470 billion into passive equity funds, while they pulled about $175 billion from actively managed equity funds, making it the only major region with active outflows. While no other region had active equity outflows, there was a sizable gap in demand in

12 Page 12 of 17 other regions. In Europe, the $103 billion collected by equity index funds more than tripled the $33 billion haul for such active funds. The story was similar in Asia, where passive equity products welcomed $58 billion in inflows versus $14 billion for such active vehicles. Exhibit 15 Flows for Active and Passive Funds by Region The opposite was true for fixed-income funds, with investors mostly preferring actively managed offerings. Globally, active fixed-income funds collected nearly $560 billion versus a more modest $270 billion for passive products. The U.S. was the exception with $210 billion going into passive funds and $176 billion entering their active counterparts. Among cross-border offerings, active bond funds absorbed $156 billion versus just $6 billion for passive offerings. In Europe, active bond funds took in $162 billion versus $47 billion for index funds.

13 Page 13 of 17 Exhibit 16 Flows for Active and Passive Funds by Category Exhibit 17 Flows for Active and Passive Funds in Major Regions by Asset Class

14 Page 14 of and 4-Star Funds Receive the Largest Inflows The Morningstar Rating for funds is a measure of a fund's risk-adjusted return relative to other funds in the same Morningstar Category. A Morningstar Rating is only assigned once a fund has built a performance track record of more than three years. Exhibit 18 Flows and Assets by Morningstar Rating, USD billion This table does not include funds with histories less than three years or that don't receive Morningstar Ratings. In 2017, just like in previous years, 4- and 5-star funds enjoyed inflows, while 1- and 2-star funds suffered outflows. In short, if you've outperformed your peers, you'll have an easier time attracting more investor money. and So Do Funds Rated Gold and Silver Unlike the backward-looking star rating, the Morningstar Analyst Rating is our manager research analysts' forward-looking assessment of a fund's prospects for outperforming its peers and benchmark on an absolute and risk-adjusted basis over a full market cycle. Morningstar analysts assign three positive ratings Gold, Silver, and Bronze as well as Neutral and Negative ratings. Only a small subset of the fund universe receives an Analyst Rating (flows into unrated funds are not displayed). Without considering funds that our analysts don't rate, Morningstar Medalist (Gold, Silver, and Bronze) funds attracted inflows and posted positive organic growth rates, while Neutral and Negative funds tended to see outflows. Exhibit 19 Flows and Assets by Morningstar Analyst Rating, USD billion This table does not include unrated global categories.

15 Page 15 of 17 Methodology Appendix The data are based on assets reported by more than 4,000 fund groups across 85 domiciles. In total, more than 95,000 fund portfolios encompassing more than 240,000 share classes are represented. Morningstar defines estimated net flow at the fund level as the change in assets between two periods not explained by the return of the fund. When a fund reports its assets at the share-class level, the share-class return is used to compute flow. If a fund only reports assets at the fund level, the return of the oldest share class is used. Fund-level reporting prevails in the U.K. market and to a lesser degree in Luxembourg. We also make adjustments for reinvested dividends, which can have a large impact in markets in which dividend payouts are significant and frequent, such as the United States. When one share class merges into another, we reduce the target share class flow in the month of the merger by the final assets of the obsolete fund. For a full explanation of our methodology please go to the following website: FlowMethodology.pdf Organic growth rate is defined as the estimated net flow over a period divided by beginning net assets. It is used extensively by the analyst community to gauge the health of asset-management firms and the industry as a whole. We occasionally reference cross-border funds. These funds tend to be domiciled in tax havens such as Luxembourg and Ireland and are distributed in many markets, primarily in Europe, but also in Asia, Latin America, and the Middle East. Morningstar s global categories are mappings of our local and regional categorization systems. The Morningstar Global Category Classifications are designed to help investors make meaningful comparisons between investment vehicles domiciled across the globe. These categories map into 10 global broad category groups allocation, alternative, commodities, convertibles, equity, fixed income, miscellaneous, money market, property, and tax preferred. Global categories are based on the investment vehicles underlying local Morningstar Category assignment. We generally include open-end mutual funds and exchange-traded products, but we exclude funds of funds and feeder funds to prevent double counting. All data used in this report were sourced from Morningstar Direct.

16 Page 16 of 17 Markets Not Included in This Report Funds domiciled in China have collectively decided not to report assets to the public in a meaningful way. Geographic Region of Domicile Definitions Region Africa Countries Included Botswana, Egypt, Kenya, Lesotho, Mauritius, Morocco, Namibia, South Africa, Swaziland, Tunisia, Uganda Asia Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand Canada Canada Cross-Border Bahamas, Barbados, Bermuda, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Monaco, Saint Vincent and the Grenadines, British Virgin Islands Europe Andorra, Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, United Kingdom Latin America Argentina, Brazil, Chile, Colombia, Mexico, Puerto Rico Middle East Bahrain, Israel, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Saudi Arabia, Turkey, United Arab Emirates Oceania Australia, New Zealand, Samoa, Vanuatu Other Europe Bulgaria, Latvia, Lithuania, Malta, Romania, Russian Federation, San Marino, Slovenia United States United States Source: Morningstar, Inc.

17 Page 17 of 17 Note: The figures in this report were compiled on March 22, 2018, and reflect only the funds that had reported net assets by that date. Only funds that existed on Dec. 31, 2017, were included. All tables and charts include mutual funds and ETPs but exclude funds of funds. Assets and flows are reported in USD billion unless specified otherwise. Data is from the Morningstar Direct Asset Flows database. 22 West Washington Street Chicago, IL USA Morningstar All Rights Reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. To order reprints, call To license the research, call