European Fund Insights: Redemptions from equity passives cause first weekly outflow since March

European investors redeemed €6.2 billion from passive equity funds in the week ended May 20th causing the first weekly outflow from the European industry since the last week of March. ETF investors also retreated with a €1.4 billion outflow from European domiciled equity ETFs.

Global equity markets had been on a three-day losing streak up to May 14th which may be one reason why passive investors decided to reduce their equity investments. This turned out to be a monthly low for equity markets as various economies around the world began to reopen and several pharmaceutical companies announced progress on a Covid-19 vaccine. However, trying to match fund investor behaviour to daily news flows is difficult due to the timing of settlements and how they are reflected in the data.

Fixed Income funds remain best-selling as companies issue record amount of debt

Fixed income funds saw the largest outflows in March, although since then investors have returned with consistent sales inflows and bond fund managers are spoilt for choice as to where to deploy capital. Companies need for cash has led to record issuance across capital markets; investment grade credit, high yield and convertibles have all seen record levels of issuance since the crisis hit in January. US investment grade issuance surpassed $1 trillion so far this year to May 26; annual issuance has averaged $1.3 trillion in the five years prior to 2020. The universe of government bonds is also expected to increase as OECD countries are predicted to issue $17 trillion in additional debt to combat the fallout from Covid-19.

Figure 1: Passive Equity Outflows Surpass Active Bond Fund Inflows (Weekly Data, In Billions of €)

*Data as at May 20th 2020 sourced from ISS MI Simfund.

Sector Breakdown

The largest passive fund outflows were observed in the European and U.S. equity sectors, both of which experienced redemptions in excess of €2 billion. Global passive strategies also saw a large outflow of €1.2 billion. A similar trend occurred in the ETF market where global, European and emerging market equities saw the largest outflows. Active healthcare and tech funds continued to take in the highest inflows within the equity sector/other category.

*Tables do not add up to 100% due to some sectors being removed.

*Data as at May 20th 2020 sourced from ISS MI Simfund.

Have Europeans turned their backs on passive?

Over the last few weeks we have noted that European investors have preferred active funds in the COVID-19 recovery. However, the most recent weekly data shows a stark change in trend with passive funds suffering large outflows in comparison to active inflows. Performance data has shown that active managers struggled to beat the market in March and April, although this has not dissuaded investors from allocating to active funds. A move to active funds may be defensive, as investors may not expect upward trending equity markets to continue, or, alternatively, investors may be looking to diversify away from industries worst hit by COVID-19 such as airlines and tourism.