Morningstar
Morningstar’s Annual Global Fund Flows Report
Synopsis of Morningstar’s inaugural report on worldwide fund flows which examines where fund investors across the globe are putting their money
W
e recently published our first report on worldwide fund flows. To our knowledge, this report is the first of its kind. The data driving this report are based on assets reported by almost 2 400 fund groups across 71 domiciles (including South Africa). In total, more than 53 000 fund portfolios encompassing over 171 000 share classes are represented. What follows is a brief except from the full report.
(US$672 billion) in the pantheon of all-time great years. Long-term open-end fund assets reached US$17.1 trillion in 2012, reaching a new high from its nadir of US$9.3 trillion in 2008. More than any other factor, low interest rates have driven investors to seek income and, to a lesser degree, embrace riskier asset classes than they would in a normal rate environment. The perceived safety of bonds relative to stocks should not be underestimated as a contributing factor.
The global fund management industry appears to be in rude health, having grown at a 3.9 per cent organic growth rate in 2012 despite ongoing worldwide economic uncertainty. Total long-term flows were US$565 billion. When ETFs are added, the total rises to US$809 billion.
The prevailing trend today, therefore, is investor hunger for yield and the quest for the perceived safety of fixed-income funds. Worldwide, these funds gathered US$535 billion in 2012, or nearly 95 per cent of long-term net flows.
The asset levels and flow figures, however, belie underlying cyclical and secular factors that have shaken the foundation of the asset management industry. The quest for fixed income and apparent permanent preference for less expensive funds – typically exemplified by the movement of assets to passive products – have transformed the economics of the industry. While AUM increased by 39 per cent between the end of 2007 and the end of 2012, management fee revenue increased only by about 24 per cent. The largest 50 non-money market funds worldwide gathered about $9.7 billion in management fees in 2007 and the largest 50 in 2012 took in only $8.3 billion, all while managing $1.2 trillion, or 32 per cent, more AUM than the largest 50 funds in 2007. Despite the enormous inflows of 2012, it still ranks behind 2009 (US$746 billion) and 2010 28
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While 78 per cent of worldwide mutual fund and ETF AUM still resides in actively managed funds, passive products captured 41 per cent of estimated net flows – US$355 billion – in 2012. With the exception of Oceania, index funds grew faster than actively managed ones in every geographic region in 2012. The United States is leading the way in its appetite for low-cost, passive strategies growing at a greater than 10 per cent rate in 2012. Passive funds in Canada, cross-border, and Asia are growing at double-digit rates. Meanwhile lower growth rates are being seen in Europe and passive funds in Oceania are experiencing negative growth. Other notable global trends included the blistering growth rate of alternative strategies which attracted net flows of US$24 billion in 2012 and the breathtaking successes of
Vanguard and PIMCO. These two giants captured 16 per cent and 18 per cent, respectively, of worldwide long-term fund flows in 2012. One other interesting trend to note is that funds without Morningstar Ratings – for the most part funds with less than a three-year track record – captured a stunning 87 per cent of worldwide flows in 2012; a trend which started with the beginning of the financial crisis. Presumably these unrated funds benefited from having track records free from the late 2007 and early 2008 market losses. This ratio of flows into unrated funds is nearly the mirror image of where the assets lie: 18.5 per cent unrated to 81.5 per cent rated. The full report can be viewed by visiting www.morningstarsa.co.za
David O’Leary, CFA, MBA | Director of Fund Research, South Africa | Morningstar South Africa