Despite slowdown, investors bearish on global funds

$565 billion flowed into mutual funds, excluding money market funds, says a Morningstar report

The global fund management sector clocked 3.9-per cent growth in 2012 despite the ongoing worldwide economic uncertainty. Excluding money market funds, $565 billion (Rs 30.7-lakh crore) flowed into mutual funds during the year, states the ‘2012: Annual Global Flows Report’ by Morningstar.

However, these inflows were less compared to the $746 billion seen in 2009 and $672 billion in 2010. “The prevailing global trend in 2012 was investors’ hunger for yield and quest for the perceived safety of fixed-income funds. Worldwide, fixed-income funds gathered $535 billion in 2012, or nearly 95 per cent of long-term net inflows,” the report says.

The survey examined the trends that drove flows into mutual funds in 2012 in five key markets – Canada, Europe, Japan, Australia and the US. “Funds domiciled in India and China have collectively decided not to report assets to the public in a meaningful way,” the report says.

The report examines each key market in detail, analysing flows by attributes such as broad asset class, Morningstar category and fund groups, as well as new fund launches.

While assets under management (AUM) increased 39 per cent between the end of 2007 and the end of 2012, management fee revenue increased only about 24 per cent. The largest 50 non-money market funds worldwide gathered about $9.7 billion in management fees in 2007. They took in only $8.3 billion in 2012, while managing $1.2 trillion, or 32 per cent more AUM than the largest 50 funds in 2007, the report says.

While 78 per cent of worldwide mutual fund and exchange-traded fund (ETF) AUM still resides in actively managed funds, passive products captured 41 per cent of estimated net flows—$355 billion—in 2012.

With the exception of Australia and New Zealand, index funds grew faster than actively managed funds in every geographic region during the year, and the US is leading the way in its appetite for low-cost, passive strategies, the findings suggest.

Region-wise flows
US fund’s witnessed estimated net flows into long-term open-end and exchange-traded funds at $434 billion in 2012, the largest sum outside of the 2009 record. These flows were driven by a sharp rebound in open-end fund flows back to pre-crisis levels and into ETFs. As a result, industry assets hit a record $10.6 trillion.

The five-year trend of investor preference for fixed income only intensified in 2012 as 84 per cent of all flows went into taxable, or municipal, bond funds, according to the report.

US stock funds were in net redemptions for the fifth-straight year, as a record $65 billion left the asset class, the report suggests.

The Euro zone crisis, however, invoked a marked shift in Europe’s fund landscape. Fixed-income vehicles witnessed an unprecedented boom in 2012. Investors poured ^178.1 billion ($230 billion) into bond funds in 2012. “In fact, bond funds captured 10 times the inflows in 2012 than they did from 2007 to 2011 combined,” the report says.

From 2007 to 2011, equity funds enjoyed greater net inflows than bond funds, posting a combined ^28.4 billion in inflows, compared with ^18.6 billion seen by fixed-income funds over that five-year period, it adds.

With net flows of 899.2 billion Japanese yen ($9 billion) in 2012, the industry marked its 17th straight year of net inflows. Equity and fixed income were the two most popular asset classes in 2012, findings suggest. The Canadian mutual fund industry had a positive year in 2012 as investors added CAD$15.9 billion ($15.4 billion) in long-term estimated net flows.