Year in Review & 2017 Outlook - Challenges and Opportunities for Actively Managed Mutual Funds

Amid stock market volatility during the early part of 2016, as well as political uncertainty over the second half of last year, investors globally stayed cautious throughout most of the past year. Fund buyers around the globe contributed US$615 billion of net flows to long-term mutual funds and ETFs during 2016, merely representing roughly 60% of the levels recorded between 2012 and 2015, when about US$1 trillion was collected each year.

Excluding passively managed index funds and ETFs, and also setting aside short-term money market products, net flows into long-term active funds turned negative in 2016, the first annual net outflows since 2011. In 2016, all of the active fund net redemptions (US$308 billion) came out of the U.S., which more than offset the net new money into both Asia and Europe/Cross-border.

Asia led active fund net flows collecting nearly US$200 billion during 2016, roughly three quarters of which was contributed by China, followed by India and Thailand with US$33 billion and US$9 billion, respectively.

Unlike in the U.S. where passive strategies continued to dominate and collected nearly all of the net new money during the first two months of 2017, investors in Europe and in the Cross-border space started pouring money into active funds again. In fact, active funds outsold their passive peers at a ratio of 3 to 1 and attracted €88 billion in net flows during January and February, almost matching the 2016 full-year result.

With increasing regulatory development and harmonization affecting mutual funds, and the rapid growth of passive investment, as well as the rise of the disruptive FinTech industry, global fund distribution continues to evolve towards “fee-for-service” and asset allocation models, while maintaining and developing various approaches across markets and sectors.

In 2016, ETF net flows worldwide surged to a record high of US$387 billion and outpaced the 2015 figure by US$17 billion. As a result, ETF AUM globally also stood at a new record, reaching US$3.52 trillion as of year-end 2016. This growth has been helped by increasing use of ETFs in the retail space.

ESG funds in local European and Cross-border markets attracted €31 billion of net flows in 2016. This renewed investor demand has been fueled by a generation that is more socially conscious and strides to make progress on sustainability, as well as by increasing government initiatives.

Cross-border bond funds attracted US$13 billion in net flows across three core Asian markets in 2016, which stood in stark contrast to the prior year’s outcome. The need for higher income and yield will likely continue to grow in Asia and globally. More diversified flexible bond, multi-asset, and equity income products are expected to be made available to retail investors in the region.