European, Asian and Cross-border AUM could rise from $10tn to $14.6tn in 2020

State of the Global Fund Industry
Year in Review & Outlook: Global Expansion Opportunities

During 2015, investors around the globe net deposited nearly US$900 billion into equity, bond, multi-asset, alternative, and other long-term mutual funds, despite a slowdown after China's stock market meltdown added to fears of a weakening world economy.

Notwithstanding the challenges of the stock market volatility and economic uncertainty in 2016 and beyond, the global mutual fund industry will likely continue to benefit from the expanding asset allocation mindset for investors globally. AUM in Europe, Cross-border and Asia could rise from US$10.1 trillion in 2015 to US$14.6 trillion in 2020, excluding money market funds.

Despite stock market volatility, ETF products globally attracted a record level of US$373 billion in net flows throughout 2015, as the industry posted new highs across nearly all major markets. Strategic Insight estimates that Smart Beta/ Fundamental Index ETFs could grow by a 19% CAGR over the next five years.

Outside the U.S., the large majority of flows continued to go to actively managed funds, as Multi-Asset funds led flow contributions among all active products, collecting €578 billion in net flows since the beginning of 2011 in Europe and Cross-border markets. However, the importance of ETFs and index funds is growing, with such products capturing 30% of long-term fund net flows in the regions during 2015.

In addition to Multi-Asset funds, various Equity Europe strategies also attracted demand, benefiting UBS, Old Mutual, AGI, Fidelity, BlackRock, Pioneer, and other managers with strong European products, and many of which have an income focus. Woodford’s U.K. income fund, CF Woodford Equity Income, took in €4.4 billion alone last year.

The bond and income arena is undergoing a rapid evolution, as investors search for income alternatives that are less correlated with traditional long-only fixed income and less vulnerable to NAV losses during periods of rising rates and sudden market dislocation. In Europe and Cross-border markets, the share of Bond Flexible Multisector funds has grown during the past five years from less than 5% of total bond assets to almost 9% today.

The net sales of alternative investment products (excluding funds of hedged funds), most of which are alternative UCITS or “Liquid Alts”, set a new record at €67 billion during 2015 in Europe and Cross-border markets, an increase of 60% compared to the result last year.

The European fund industry is increasingly expanding through Cross-border UCITS, and their share of total UCITS assets has risen from less than 10% a decade ago to a slight majority today. Strategic Insight projects that Cross-border UCITS will likely expand by 8.4% annually over the next five years, much faster than the 5.4% annual growth rate for local European funds.

Over the next five years, we believe the Asian fund passport and mutual recognition schemes could compete with UCITS in certain markets (Greater China, for example) and certain asset classes (such as Asian stocks and bonds). We expect more cooperation among regulators to provide investors with more efficient access to mutual fund investment at a lower cost and a higher degree of investor protections.

China ended year 2015 with US$143 billion of net deposits into long-term funds, topping all other markets in Asia. As China continues to liberalise its capital market toward RMB internationalization, international managers will likely have more opportunities to enter the Chinese market and build brand awareness. The existing and upcoming Cross-border channels and programs include the QFII, RQFII, QDII, potential QDII 2, as well as Shanghai-Hong Kong Stock Connect (and other possible stock trading links), and the China-Hong Kong Mutual Recognition of Funds (MRF) scheme.

Throughout 2015, Japan saw an aggregate inflow of over US$103 billion from long-term funds, ranking second only to China in Asia. 18 of the 30 highest cash flow funds last year in Japan were sub-advised by foreign managers. The shift from a transaction based commission model to AUM based "fee-for-service" models and asset allocation "wraps"’ brings more sub-advisory opportunities.

Despite challenges, the NISA program in Japan continues its success and expands further in 2016, which includes the increase of the tax-exempt contribution amount for NISA and the introduction Junior NISA. Japanese regulators, industry associations, asset managers, and fund distributors are continuing to actively promote the NISA program. For example, each year February 13 is set up as “The Day of NISA.”

South Korea followed suit and announced that its Individual Savings Account (ISA) scheme would be launched on March 14, 2016, which allows Korean investors to invest no more than W20 million (US$17,000) tax-free per year with a five-year lock-in period.