After a record high US$828 billion of mutual fund flows during the first half of 2015, Q3 saw the first quarterly net outflows in nearly four years (since Q4’ 2011) — equity, bond, multi-asset and other long-term funds globally suffered a combined US$82 billion in net redemptions, bringing down the year-to-date through September contributions to US$746 billion.
Q3 outflows were triggered by the market crash in China and a sharp decline of global commodity prices. In fact, if excluding US$122 billion of net withdrawals from Chinese funds, the Q3 flows would be positive at US$40 billion. We expect that long-term mutual fund flows during the last quarter of 2015 and early 2016 will recover and continue albeit at a slower pace.
U.S. investors net redeemed a moderate US$30 billion out of long-term funds during Q3; however, actively managed funds suffered nearly US$100 billion in net redemptions during the quarter, almost evenly split between Equity U.S. and Taxable Bond funds; in comparison, passive ETF and index funds collected inflows across all asset classes, totaling almost US$70 billion.
In Europe, locally domiciled and sold long-term funds, mostly asset allocation and equity products, added a net €25 billion (US$28 billion) in net flows during Q3, while cross-border funds saw €12 billion (US$13 billion, of which US$5 billion from Asia) in net outflows throughout the same quarter. Multi-asset products attracted the most inflows in both local and cross-border markets during Q3.
In Europe, FoFs have returned and become part of packaged solutions to meet the investors’ needs of asset allocation and risk diversification in the wake of increasing market uncertainty and volatility. External FoFs attracted nearly €75 billion in net flows through September 2015 in Europe (€10 billion in Q3), accounting for a quarter of the total contributions in the region.
Some Spanish managers and advisers have increased the use of ETFs as part of their core asset allocation. According to Inverco, the ETF assets accounted for 15.2% of the total cross-border assets in Spain as of Q3’15, an increase of more than 60% since year-end 2014. BlackRock was the largest beneficiary who grew its ETF assets by 70% in Spain to €10.1 billion during the same period.
Italian managers and advisers take a more active and flexible investment approach into FoFs. The majority of top selling FoFs in Italy were flexible and balanced multi-asset products, investing most of their assets in various actively managed funds. Many of them are marketed as multi-asset solution products that are able to adapt to the changing market conditions.
Net flows into long-term funds in Japan reached to US$36 billion in Q3, more than doubling the prior quarter’s result. Japan’s year-to-date aggregate inflows exceeded US$90 billion, surpassing China to take the lead as the largest inflow market in Asia. This strong and steady growth was partly attributed to a combination of meaningful structural changes affecting fund distribution models, the role of new funds, and longer term investment.