June 2018 Data through 31 May Morningstar Direct SM Asset Flows Commentary: Europe EU troubles and emerging-markets jitters prompt investors exit from equity and bond funds. By Valerio Baselli and Ali Masarwah, EMEA Editorial Research Team A return of anxiety over the stability of the eurozone and emerging countries prompted a wide-spread exit of investors from equity and bond funds in May. Long-term open-end funds and exchange-traded funds suffered combined net outflows of EUR 12.2 billion, thus making last month the first negative month flow-wise since November 2016. Outflows also marked the highest level since January 2016, according to Morningstar s estimates. Open-end equity funds and equity ETFs shed EUR 7.7 billion in net terms, the highest level of redemptions since June 2016. Before dipping into negative terrain, inflows had shrunk progressively over the course of several months. European and emerging-markets equity categories were the most prominent victims while global large-cap, technology, and US growth funds witnessed handsome inflows. Bond funds tanked, and outflows of EUR 14.2 billion made May 2018 the worst month for Europedomiciled bond funds in five years in flow terms. The previous low was marked in June 2013 when the so called taper tantrum provoked a wide-spread exit of investors from bond funds. As was the case back then, high-yield, emerging-markets, and other funds that invest in riskier segments of the bond markets suffered the most. Allocation funds remained net-flow positive, but demand stood at the lowest level since December 2016. Inflows to alternative funds was muted too, although last month s levels were in line with the lacklustre demand seen this year for these regulated hedge fund strategies. Precious-metals funds (mostly exchange-traded commodities) shone as investors flocked yet again to these funds, which are typically sought in times of market stress. This trend has been playing out for the past months ever since volatility staged a comeback at the beginning of February. Money market funds witnessed outflows of EUR 11.3 billion, which mainly exited France-domiciled products. Flows by Global Broad Category Group (ETFs and Open-End Funds) Net (EUR Market Share % Estimated Net Flow (EUR Mil) Name 5-2018 5-2018 1 Mo YTD 1 Yr 1 Yr Allocation 1,360 13.87 5,055 50,282 123,512 10.34 Alternative 476 4.85 2,929 20,023 55,122 13.01 Commodities 75 0.76 1,368 4,490 6,098 9.28 Convertibles 65 0.67 (103) 6 (560) (0.86) Equity 3,775 38.49 (7,699) 57,335 171,343 5.09 Fixed Income 2,612 26.64 (14,221) 8,819 186,835 7.66 Property 136 1.39 634 3,503 7,549 5.58 Miscellaneous 113 1.15 (344) 161 370 0.33 Unclassified 7 0.07 174 634 899 15.58 All Long Term 8,618 87.87 (12,207) 145,253 551,167 Money Market 1,189 12.13 (11,310) 60 20,343 1.65 Total 9,807 100.00 (23,518) 145,313 571,511
Active vs. Passive On an absolute level, inflows to passive funds (open-end products and ETFs) dwarfed those targeting actively managed funds in May. Actively managed alternative, allocation, equity, fixed-income, and commodities products saw combined net outflows of EUR 13.8 billion compared with EUR 1.2 billion of net subscriptions for open-end index funds and ETFs. Passive bond funds continued their winning streak in May. While making up only 12% of the European bond-fund universe, passive bond funds grabbed EUR 1.9 billion in net new money last month, compared with EUR 16.2 billion of outflows marked by actively managed fixed-income products. Over the past 12 months, passive bond funds have displayed an organic growth rate of 10.4% compared with 7.3% for their active counterparts (organic growth rate defines flows as percentage of assets at the beginning of a given period). Demand for equity index funds sagged markedly. After enjoying net inflows of EUR 740 million in April, flows were down to about EUR 2 billion of net redemptions in May. This goes back to outflows from equity open-end index funds, which saw their first negative month of flows since October 2016, shedding net EUR 9.4 billion; equity ETFs, conversely, continued to see strong demand, with EUR 1.9 billion of new subscriptions in May. Physical commodities funds are dominated by exchange-traded products, which make up 76% of the market. In May, these products grabbed an even higher share of flows: Their net inflows of EUR 1.15 billion amounted to 95% of all inflows sent to commodity funds. In the trailing 12 months through May, the organic growth rate of passive commodities funds was 11.3% versus 2.9% for actively managed commodities funds. Flows by Global Broad Category Group: Active vs. Passive Active Passive Estimated Net Flows 1 Mo. 1 Year 1 Mo. 1 Year EUR Mil Allocation 5,054 123,446 1,359 1 66 2 Alternative 2,897 54,010 462 32 1,112 13 Commodities 150 450 17 1,218 5,648 57 Equity (5,730) 83,124 2,776 (1,969) 88,219 999 Fixed Income (16,159) 157,144 2,290 1,938 26,690 322 Source: Morningstar Direct Asset Flows. Fund-Level Categories: The Leaders A look at the most loved Morningstar Categories reveals that global large-cap blend equity funds enjoyed the highest inflows. These flows most likely reflect investor optimism regarding the prospects for global economic growth. Investors favored passive products for exposure to global equities, but active funds also saw positive net flows. The inflows sent to UBS ETF MSCI ACWI SF more than EUR 3 billion came close to matching half of the total net inflows to the category. This was quite the opposite of the developments within the technology sector equity category, where actively managed funds attracted about 90% on net inflows. Technology sector is a clear momentum play. Many investors have apparently identified the fundamentals of this sector as being attractive. Because most of the big tech stocks are US companies, this also explains to some degree the high demand for US growth funds.
Flows by Fund-Level Categories: The Leaders (Long-Term and ETFs, Active vs. Passive) Active Passive Estimated Net Flows EUR Mil Global Large-Cap Blend Equity 1,766 6,934 384 4,402 7,871 168 Sector Equity Technology 1,316 6,360 47 224 950 4 EUR Flexible Allocation - Glb 1,126 10,248 147 0 (101) 0.1 EUR Cautious Allocation - Glb 1,094 4,583 134 0 0 0 Commodities Prec. Metals (3) 78 2 1,078 2,009 42 Source: Morningstar Direct Asset Flows. Fund-Level Categories: The Laggards Turning to the unloved categories, the fact that, in many cases, outflows hit both active and passive funds alike indicates that asset-allocation decisions were the main driver for redemptions out of these products. Equity investors shied away from European large caps (more than EUR 3 billion of net redemptions in May) and emerging-markets funds (EUR 1.3 billion of net outflows). Flexible-bond and high-yield bond funds also remained on European investors sell lists. Specifically, the USD high-yield bond category suffered its 12th consecutive month of net outflows. Within the category, Neuberger Berman High Yield Bond Fund, which has a Morningstar Analyst Rating of Silver, shed EUR 230 million in May, which brings the fund s net redemptions of the past year to over EUR 2 billion. At the category level, fund-specific stories had their impact. The outflows from the USD diversified bond category were motivated to a large degree by the outflows from the UBS Focused SICAV - High Grade Long Term Bond USD. It suffered EUR 2.1 billion of net redemptions alone. Flows by Fund-Level Categories: The Laggards (Long-Term and ETFs, Active vs. Passive) Active Passive Estimated Net Flows EUR Mil USD Diversified Bond (3,272) (1,147) 36 (10) (93) 3 Glb Flex. Bond USD Hdg (3,038) (1,924) 100 0 0 0 EUR Ultra Short-Term Bond (2,261) (958) 117 107 (9) 3 USD High Yield Bond (1,509) (8,553) 57 (297) (392) 5 UK Large-Cap Blend Equity (1,277) (1,631) 64 (444) (725) 82 Source: Morningstar Direct Asset Flows. Fund Providers: The Leaders Natixis topped the list in terms of inflows within the active spectrum, thanks mainly to strong sales of British subsidiary H20 Asset Management, which specializes in alternative funds. H2O funds gathered more than EUR 1.2 billion of new assets during the month. Particularly, H2O Adagio (an absolute return strategy managed with an annual ex-post volatility target) attracted EUR 580 million in May.
At the beginning of May, H2O Asset Management announced the soft closure of two of its globalmacro funds following huge levels of inflows into its range since the start of the year. The Londonbased group will impose a 5% entry fee on H2O Multistrategies and H2O Vivace from 1 July. BlackRock enjoyed handsome inflows within both the active and passive universes in March. Within actively managed products, the top seller was BSF Style Advantage Fund (a subfund of BlackRock Strategic Funds that seeks to achieve an absolute return investing in a diverse set of long-short strategies, each of which represents pure exposure to a specific style factor) with EUR 700 million in net inflows. In general, BlackRock s alternative funds were the most sought after with more than EUR 1.6 billion of net subscriptions in the month. For the passive providers, the ranking was dominated in May by UBS net inflows of EUR 2.3 billion. The passive arm of the Swiss asset manager enjoyed hefty inflows to its equity products, particularly global large-cap equity funds, which accounted for more than EUR 2 billion of new net subscriptions. Fund Providers: Largest Inflows, Active (Excluding Money Market Funds) Net (EUR Name 5-2018 1 Yr 1 Yr Natixis 92 1,856 8,439 15,648 21.52 KBC 76 1,461 870 2,498 3.41 Union Investment 157 1,262 4,237 13,477 9.45 BlackRock 207 868 8,444 23,086 12.75 Old Mutual 43 764 4,303 9,269 29.62 Fund Providers: Largest Inflows, Passive (Excluding Money Market Funds) Net (EUR Name 5-2018 1 Yr 1 Yr UBS 122 2,285 6,927 12,463 11.57 BlackRock 135 1,854 418 24,707 24.00 Xtrackers 76 1,583 5,427 13,076 21.65 Vanguard 135 436 5,018 11,773 10.11 ProCapture 3 343 833 1,422 124.56 Fund Providers: The Laggards PIMCO topped the list of laggards within the active spectrum. Redemptions from its flagship PIMCO GIS Income, Europe s largest actively managed fund, were the most significant detractor (EUR 2.5 billion) for the US asset manager. Amundi suffered outflows from its euro fixed-income products (EUR 1.4 billion), with its ultra short-term bond funds particularly badly hit (EUR 902 million). On the passive side, redemptions from eurozone large-cap equity funds were the most significant detractor for ishares, which suffered outflows of EUR 727 million from its 15 eurozone products. IShares Euro Stoxx 50 saw investors withdraw EUR 382 million of net assets, which brings the fund s outflows to 1 billion euros for the year to date.
Fund Providers: Largest Outflows Active (Excluding Money Market Funds) Net (EUR Name 5-2018 1-Mo YTD 1 Yr 1 Yr PIMCO 150 (4,455) (4,358) 29,835 24.80 UBS 144 (2,916) 3,846 8,397 5.95 Amundi 242 (1,531) 5,847 23,712 10.85 JPMorgan 163 (1,498) 3,314 9,179 6.19 Pictet 85 (1,474) (1,166) 1,120 1.35 Fund Providers: Largest Outflows Passive (Excluding Money Market Funds) Net (EUR Name 5-2018 1-Mo YTD 1 Yr 1 Yr ishares 305 (1,840) 4,726 29,419 10.80 Royal London 18 (1,345) (1,439) 27,534 27.83 Swisscanto 35 (155) (560) 140 3.91 Danske Invest 4 (146) 279 (478) (4.89) Lyxor 68 (146) (292) (830) (11.26) The Largest Open-End Funds and ETFs PIMCO GIS Income witnessed the fourth month of net outflows. In May, it shed EUR 2.5 billion, well above February, March, and April levels when the Silver-rated flexible-bond fund bled EUR 611 million, EUR 548 million, and EUR 209 million, respectively. The fund s assets had peaked at EUR 60.5 billion in January and have since dropped to EUR 58.9 billion. Silver-rated M&G Optimal Income enjoyed its 18th consecutive month of net inflows (after a lengthy period of outflows), although they came at levels well below the average of previous months. Bronze-rated JPM Global Income also continued its winning streak despite a negative 2.3% performance for the year to date as of May 31 (this pertains to the A share class from the perspective of eurozone investors), thus underperforming both the peer group and benchmark. 5 Largest Long-Term Actively Managed Funds by Net Net (EUR Name 5-2018 1 Mo YTD 1 Yr 1 Yr PIMCO GIS Income 58.95 (2,498) (2,010) 24,681 71.81 AP7 Aktiefond 41.81 83 434 1,981 5.49 M&G Optimal Income 27.07 268 1,935 5,843 27.53 JPM Global Income 25.45 507 2,517 6,140 31.25 Allianz Income and Growth 22.42 1,226 3,392 5,294 34.21
Within the index universe, in the duel between the two largest S&P 500 trackers--which are both rated Gold--iShares Core S&P 500 ETF clearly upped Vanguard S&P 500 ETF, posting net inflows of EUR 629 million versus net outflows of EUR 112 million for the Vanguard fund. IShares Core MSCI World ETF saw positive net flow of EUR 466 million in May. Open-end index fund ishares UK Equity, conversely, continues its negative streak with more than 2 billion euros of net redemptions for the year to date. 5 Largest Long-Term Passive Funds by Net Net (EUR Name 5-2018 1-Mo YTD 1 Yr 1 Yr ishares Core S&P 500 ETF 23.16 629 649 2,492 13.35 Vanguard S&P 500 ETF 20.06 (112) 1,191 1,940 11.74 ishares Core MSCI World ETF 12.47 466 546 1,779 18.01 ishares Developed World Index (IE) 11.67 (81) 633 562 5.45 ishares UK Equity Index (UK) 10.68 (116) (2,089) (2,162) (17.71) To learn more about Morningstar Direct Asset Flows, visit us at this link. Data Notes The figures in this report were compiled on June 25, 2018. Approximately 31,000 Europe-domiciled open-end funds and ETFs that Morningstar tracks from more than 1,750 fund companies across more than 35 domiciles were included. Organic growth rate is flows as a percentage of beginning assets. Please note that Morningstar's current asset flows methodology might not include pre-inception subscription-period inflows of so-called target date funds in net asset flows estimation.