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Fund Flows in the UK
In this article, we discuss the trends in the UK funds market.
We must give complete credit to the UK Fund Management Association for the information we comment on in this article. All of the graphs and statistics are from their 2012 Annual Asset Management Survey. Because of the number of graphs, this document is quite long – but it is worth persevering with because it is interesting, as well as being a quick read.
There are a few broad themes that we address in this document, albeit briefly, because they are self explanatory. These being:
- Passive and the trends in passive
- Asset Allocation trends
- Net pooled fund flows in the UK
- What fund categories have been the beneficiaries of flows?
- Holding period of retail investors
- Top ten asset managers in retail (UK)
- Fund Domiciles: Lux vs Dublin.
- Average Costs to run an Asset Manager in the UK
1. Passive and the trends in passive
There are a few important things to note, within the context of passive within the UK:
- Chart 4 shows that about 20% of funds managed by UK fund managers are in passive vehicles. Interestingly, within pension fund clients, this number is closer to 35%.
- Over time, passive is increasing its share of the market.
- Chart 44 relates to pooled funds only. What it shows is that, unlike with active, there is a far greater inclination to prefer local equity index funds as the default first choice (over countries/regions outside the UK). It seems that in the early stages of any offering (in this case ETFs, passive unit trusts), clients see the local market as the early default choice. South African retail investors, if they follow this trend, will continue to prefer SA equity index funds over global or emerging, for example.
2. Asset Allocation trends
- The first chart shows us that UK equities (which are largely actively managed) are no longer the default asset class choice among investors – for both institutional and retail investors. It also shows us that equities, in general, are losing the appeal they had in the 90’s. Equities were almost 90% of assets in the early 90’s, now they are close to 50%. So, what would we conclude? Country chauvinism is on the wane – South Africans can expect clients to start allocating more funds into markets outside of South Africa (and increasingly so), perhaps settling at around 40-50% over time.
- The second chart shows us that less investment is going into equities and more is going into fixed income (the great beneficiary of the equity exodus). Since 2007, equity and bond allocations (on average) were 50% and 30% respectively, now they are almost identical around 40%. We arent in the business of calling markets, but it strikes us that bond yields do not justify the demand and interest they are receiving. See the below graph:
(by the way, the yields have since dropped further, at around 1.7% at the time of writing)
Below, the chart shows the country allocation splits since 2006 within equities. A few comments worth noting:
- Trends are away from UK, the blue bar (as we also saw earlier). But, clearly investors are not moving en masse. The allocation to the UK seems to have stabilised at around 40%.
- There has been a major shift towards emerging markets. Its allocation has increased by a factor of 6x from 2006-2011.
- Asia ex Japan has also seen an increase in flows. Asset managers are increasingly positioning themselves in Asia to take on the growth in savings pools within these markets. Dave Foord is one of the first South Africans to locate themselves in the east.
3. Net pooled fund flows in the UK
There are two worthy comments here:
- The UK has seen net flows every year – even in 2008, when risk was off the table.
- 2009-2011 has seen more flows than the previous 7 years combined. This, in a recession. We think this is driven by a very low interest rate environment where savers are no longer turning to banks to provide them with income (and they are skeptical of banks to protect capital too).
- The second chart supports this second point. The rate that lenders borrow from their banks has a direct relationship with their allocations to savings (lower the rate, higher the savings). The base rate bottomed out in 2009, which is when flows to funds made a step change.
4. What fund categories have been the beneficiaries of flows?
Flows into balanced funds have been the biggest beneficiaries with most clients prefering a cautiously managed fund (lower equity – see below table too). Fixed income funds (read: anything helping pensioners find yield) have also been beneficiaries as the sentiment towards banks has decreased. Equity funds remain in demand, but seemingly on a decreasing basis. Absolute return funds are also material players (these being balanced funds with an absolute return mindset).
If we add up the total flows across all fund types over the 3 years, we get £77bn. What we find is that mixed asset + absolute (balanced) = 29% of this total. Fixed income is 27% and Equity is 23%. These categories account for 80% of all flows.
The below table unpacks the flows of mixed assets in more detail (showing cautious managed as a slight leader over standard balanced). Flexible (active managed) is in significantly less demand.
5. Holding period of retail investors
Its interesting (and understandable – but perhaps not rational) that holding periods have come down. We think a few factors contribute here:
- Holding periods reduce during periods of market uncertainty and 2007-2011 was a very volatile period.
- Choice and competition has increased dramatically since 1997, when holding periods were a lot higher.
- Platforms (lisps) have also become mainstream, facilitating fund selection.
6. Top ten asset managers in retail (UK)
We thought it useful to add this. Many managers may not be well known in South Africa (for the time being). You may also find it interesting that this list has changed significantly – only five of these companies were in the top 10 in 1995.
7. Fund Domiciles: Lux vs Dublin
Luxembourge is by far the largest UCITS domicile, although it is gaining market share from the UK and losing some to Ireland. The UCITs passport has gained increasing traction for two reasons: a) Its is considered to have the best regulation and regulation is high up the agenda for now, b) There is a herd aspect. When domiciles are favoured by many (as Lux and Dublin are), this tends to positively self fulfil.
8. Average Costs to run an Asset Manager in the UK
This chart also shows average revenue numbers which are not worth paying much attention to (they mix asset classes, for example). But the cost line is interesting and fairly stable. It costs about 20 basis points to manage a global asset manager (when it is at scale). Further to this, you may find it interesting that less than 30% of the head count of an asset manager (on average) is associated with fund management. See below: