The figure comes from fund research firm Strategic Insight (SI), an Asset International company, in its latest release of the State of the Global Fund Industry report. The research shows that, while the net flows into investment funds remained essentially level during 2013, the allocations changed dramatically in terms of the types of funds seeing the strongest interest.
Most notable, says Strategic Insight, is a shift away from traditional bond funds and into equity, multi-asset, non-traditional income, and alternative strategies.
“Equity funds worldwide absorbed $610 billion of net inflows last year, slightly higher than the peaks in 2006 and 2007,” explains Jag Alexeyev, head of global research at Strategic Insight. “But other asset classes and themes also offered big opportunities for fund managers, especially outside the United States. Demand for non-traditional income, liquid alternatives, and asset allocation solutions expanded, and will continue to rise alongside the equity revival.”
When factoring in performance gains, worldwide assets under management grew to a total of $3 trillion. Funds in Europe, including cross-border products, played an important role and accounted for about half of worldwide flows, with a notable expansion among local European structures.
Actively Managed Funds Absorb $600B – Mostly Outside the U.S.
Strategic Insight says mutual funds in the U.S. accounted for three-quarters of the global net flows to equity products last year. But more than 60% of that went to index funds and ETFs, the firm says. In contrast, outside the U.S., just one-quarter of equity flows went to passive strategies.
Active fund managers outside the U.S. further benefited from substantial gains through non-traditional bond, mixed asset, and other long-term funds. Overall, actively-managed funds captured $570 billion of net inflows worldwide during 2013, of which three-quarters was generated outside of the U.S.
Funds in Europe and cross-border captured €320 billion ($425 billion) of net inflows during 2013, up 12% from the prior year, excluding money market vehicles. This was driven by local European funds, whose inflows doubled and surpassed €100 billion. Cross-border international funds based in Europe, which are also sold in other markets such as Asia and Latin America, gained €220 billion, or 8% less than in the year before.
Equity strategies captured 33% of inflows to European and cross-border funds during 2013, Strategic Insight says, compared to just 4% in the year before. Similarly, mixed asset funds attracted 31% of inflows, rising from 10%.
Bond funds saw their share diminish, but still accounted for 30% or €100 billion of net gains. Much of this went to high yield, global unconstrained multi-sector bond, and flexible income strategies. Specialist segments such as convertible bond and senior loan funds also experienced growth, along with selected alternative credit strategies.
Strategic Insight says these factors should lead European investors to remember 2013 as one of the more balanced years on record, with roughly equal contributions to the two main asset classes and to multi-asset vehicles, providing opportunities for a broader range of firms.
Yet by the fourth quarter, equity funds’ share of net flows had risen to nearly 60%. “Progress during 2014 may be even more concentrated in equities if the global economy continues to recover and stock markets do not encounter any major setbacks,” Alexeyev says. “But the growth of asset allocation solutions, both through multi-asset vehicles or professionally advised diversification across specialist funds, and the persistent demand for income strategies should help prevent investments from getting too unbalanced as in the past.”
New Launches in Japan, and Multi-Asset Income and Equity in Hong Kong
Strategic Insight says a few segments in Asia also provided meaningful opportunities for local and international fund managers, notably in Japan, where flows grew by almost four times to reach $45 billion, primarily through new launches. In Hong Kong, retail gross sales of local and cross-border funds expanded by 30% to a record high, as a surge in multi-asset income products in the first half gave way to rising sales of equity strategies through the end of the year.
Bryan Liu, head of Asia research at Strategic Insight, says that total net new assets raised in Asia exceeded $60 billion in 2013. This sum was dragged down by China, he explains, where investors redeemed $25 billion, mostly from equity funds as the multi-year stagnation of region’s stock markets took its toll.
Continued Evolution of the Bond and Income Fund Business
The bond and income fund business continues to rapidly evolve as investors search for income alternatives that are less correlated with traditional long-only fixed income, and less vulnerable to losses during periods of rising interest rates.
Researchers say this has supported the expansion of unconstrained, flexible, absolute return, and other non-traditional bond and income funds. Such funds now account for 13% of bond fund assets in Europe and cross-border, rising from 8% during the past five years.
The adoption of non-traditional income was even stronger than the gains experienced by the broader universe of alternatives, Strategic Insight says, whose share of long-term fund assets now approach 7%. Beyond bond funds, the demand for steady income has also sparked the growth of multi-asset income strategies, dividend equity, and funds that invest in other sources of income such as infrastructure and energy investments (including master limited partnerships).
Non-Traditional Funds and Liquid Alternatives Grow in Importance
Non-traditional strategies, including absolute return and liquid alternatives, together captured more than $250 billion of net flows around the world during 2013. Strategic Insight says this will likely accelerate as investors further adjust allocations away from long-only bond risks and seek to limit exposure to stock market drawdowns.
The demand for non-correlated lower volatility alternatives is supporting innovation and growth in a variety of sectors, including hedge style strategies in mutual funds, hybrid absolute return, institutional diversified growth funds, risk-managed solutions, and smart beta alternative indexing approaches.
“The fund industry in five years will look very different,” says Alexeyev, “transformed not only by innovations in fund management and solutions, but also changes in regulation, investment advisory, and distribution models.”
More information on Strategic Insight and it’s latest research findings is available online at www.SIonline.com.