Where do European asset managers invest in times of uncertainty?

EFAMA has published its 2020 Fact Book, providing an extensive overview of the current fund and asset management industry, and the performance of the industry in 2019. Overall, the industry observed steady growth, but concerns over an economic slowdown, political uncertainty and rising interest rates influenced asset allocation and overall industry performance. With the coronavirus pandemic and crisis unfolding at the end of 2019, we expect most of the pandemic fallout to be captured in the 2020 report.

Below we take a deeper look at the report and resulting insights.

The growth of ETFs

The significance of ETFs has grown steadily in recent years and they have become an increasingly popular investment instrument, thanks to their flexibility, liquidity and cost efficiency, combining the low cost and broad diversification of investment funds with the realtime pricing and trading of equities. The growth in ETFs demonstrates the sentiment of uncertainty prevalent amongst investors. Without a clear vision on where and how to obtain above-average performance, investors turn to index-tracking ETFs.

In Europe, the vast majority of ETFs are created as UCITS and are therefore subject to a robust regulatory framework. Overall, net ETF assets rose from EUR 448 billion at the end of 2015 to EUR 859 billion at end 2019.

Net sales of ETF amounted to EUR 104 billion in 2019, up from EUR 18 billion in 2018. Net sales of ETFs expressed as a percentage of total UCITS net sales also increased from 15% in 2018 to 27% in 2019, the highest-ever relative net sales.

Zooming in on the specific types of ETF funds, equity ETFs accounted for 68% of the total market at the end of 2019, followed by bond ETFs (29%) and other ETFs (3%). The breakdown of net sales per ETF type shows a completely different picture, with bond ETFs accounting for 60% of total ETF sales in 2019. Bond ETF sales is a reflection of market uncertainty and a flight to safe assets, in combination with record-high equities.

The surge in bond UCITS sales

Since their creation, equity funds have dominated the makeup of UCITS assets and by the end of 2019, equity funds continued to account for the largest share of UCITS assets, at 39%. Bond funds were next with a market share of 28%, followed by multi-asset funds at 18% and money-market funds at 12%.

Interesting to note, however, was the dominance of bond funds in the net sales of UCITS in 2019. With a backdrop of trade tensions and economic contraction caused by the fallout of the coronavirus pandemic, and aided by central bank monetary easing, inflows into bond funds (EUR 303 billion) represented the overwhelming majority of UCITS sales.

Average fund holding periods

Average holding periods of funds provide an estimate of how long investors remain invested in a fund. Over the 2016-19 period, European investors remained invested in equity funds for an average of 2.8 years and in bond funds for an average of 2.1 years. Multi-asset funds were held for an average of 3.2 years, the longest of all long-term funds.

The lower average fund holding period for equity and bond funds can be explained by the internal portfolio rebalancing that is undertaken automatically in response to market developments. When portfolios are built around equity and bond funds, the rebalancing of the asset allocation is made by switching funds, often following suggestions from advisors.