It’s what’s known as a Goldilocks market: Not so hot that it causes inflation and not so cold that it leads to recession. And there’s not a bear in sight. The fairytale scenario in Europe led to a record net inflow of €779 billion ($963 billion) for European fund managers in 2017, lifting their assets under management for private investors to almost €9.6 trillion, according to figures published today by Ali Masarwah, an analyst at rating agency Morningstar.
The nine-year bull market has allowed diversified equity funds to deliver gains of more than 10 percent on average over the last 5 years. The markets’ resilience to political upsets such as Brexit and the election of Donald Trump have made investors even more upbeat. “Investors are buying because they’re confident that markets will continue to boom,” said Diana Mackay, co-founder of London consultancy Mackay Williams.
Surprisingly, bond funds saw record inflows of €313 billion last year even though interest rates are at historic lows and some government bonds have negative yields, meaning investors effectively have to pay to own them. That increase reflects a switch in investor behavior, said Matthias Hübner, an asset management expert at consultancy Oliver Wyman. “They’re going away from products with government bonds and towards ones with corporate bonds, and partly also bonds issued by emerging countries — in search of higher returns,” he said.
Mr. Masarwah at Morningstar said there’s also growing demand for funds that are more flexible in their investment strategy such as the Income Fund offered by US giant Pimco, which saw the biggest single net inflow last year of €41.5 billion. “The Pimco fund used to be strongly invested in the US housing market, now it’s stronger in emerging markets,” he said. Equity funds and mixed funds were also in high demand last year.
It begs the question when the fund boom is going to end. “As long as the stock markets continue to rise and there’s no big interest rate hike in Europe, asset managers are likely to keep on enjoying fund inflows,” said Mr. Hübner at Oliver Wyman. That view is shared by Philipp Koch, an asset management expert at McKinsey. “The environment for the industry is simply perfect,” he said. “Asset management has always been a growth industry. Its funds under management and profits have trebled in the last two decades. New money from investors and rising capital markets were the driving forces.”
Still, there’s no shortage of skeptics. They’re warning that the European Central Bank’s ultra-easy monetary policy has driven investors into high-risk assets, distorting prices and creating fragile markets. “If the environment remains stable, the sector will continue the positive trend and remain on track for more records. But there are risks. They include geopolitical uncertainties such as North Korea and the Middle East. An escalation could quickly unsettle markets and throw the fund business off track,” Mr. Koch said.
Nobel Prize-winning economist Robert Shiller warned this week that a market correction could come at any time and without warning. “People ask, 'Well, what will trigger it?' But it doesn't need a trigger, it's the dynamics of bubbles [that] inherently makes them come to an end eventually," he told CNBC on the sidelines of the World Economic Forum in Davos.
But Michael Schoenhaut, a successful multi-asset portfolio manager at JP Morgan Asset Management, remains upbeat despite the current high valuations. “The last phase of the market upturn is yet to come and it will bring the highest yields,” he said.
Ms. Mackay at Mackay Williams said a closer look at the 2017 fund data revealed harbingers of a correction. “The lion’s share of the fund inflows has come from new money put in by investors, not from the profits generated by the managers in the capital markets,” she pointed out. That was short-term money that could quickly be withdrawn when markets turn sour. She said the large amount of money flowing into index funds, exchange-traded funds that have no fund managers who take active investment decisions and instead track bourse indices like the DAX, were an indication of a more fickle approach by investors. “The products are often used for short-term investments and are quickly sold when things go wrong,” she said.
But until markets turn, asset managers will continue to pop the champagne corks. The jump in demand for higher-risk funds is a further boon because they generate higher fee income. An equity fund charges an average annual fee of 1.6 percent, according to a calculation by Morningstar. And many of the bond funds that are becoming more popular aren’t much cheaper.
Ingo Narat is a senior financial editor at Handelsblatt, and an asset management and financial markets expert. To contact the author: narat @handelsblatt.com