Retail managed fund flows: signs of recovery?

We’re in the midst of preparing the latest edition of the Tria Retail Managed Funds Review – a quarterly subscription report that provides regular insights into the Australian retail funds landscape¹ – so we thought this week’s Trialogue would be a nice opportunity to share some high-level observations from our June 2014 release.

The last 5-6 years have been a particularly tough period for managed funds. A combination of cyclical market factors, stemming from the GFC and structural factors, in large part driven by the rise in SMSFs, has significantly constrained organic growth.

However as the below chart shows, there have been tentative signs of recovery in the last 12-18 months. While not approaching the levels seen prior to 2007, $5.9bn in annual net flows is an encouraging result.

tria sept 25

This story does vary between asset classes, with Multi-sector, Global Equities and Fixed Income driving recent growth, but Australian Equities continuing to suffer.

chart 2

Some asset class observations:

Multi-sector

The strong growth in Multi-sector diversified products is a particularly interesting trend driven by a number of factors including:

  • The steady default flows from Retail Corporate Super plans – which are largely unaffected by cyclical investment factors
  • Flows from a segment of financial advisers (often institutionally aligned), whose proposition does not rely on client investment portfolio construction.  There’s evidence that many of these planners have returned to multi-sector products in recent years, because of the business and client efficiencies they deliver. This trend is particularly evident in pension draw down phase, where multi-sector flows are seeing solid flows on many Retail platforms

Global Equities

After a long period of sluggish growth, Global Equity funds are again seeing positive net flows, driven in large part by strong investment performance in 2013-14.  As returns pulled back in the last quarter, flows have started to slow in response.

From a structural perspective, we also think Global Equity funds are less impacted by the rise of SMSFs and Wrap platforms. Few wealth clients today hold direct international equities and most advisers still use managed funds for global asset exposure.

It’s worth noting that positive net flows tend to be concentrated in a relatively small number of very well-known players, with a long tail of largely unsupported funds. The bar for success in this asset class is set pretty high.

Australian Equities

The headline Australian Equity flow figures make for grim reading. The sector has never really recovered from the GFC and continues to bleed investors and FUM. The rise of dealer group direct equity model portfolios and SMSFs have created a perfect structural storm for the category.

However underneath the headline figures it’s not a universally dire story – while there was ~$19bn in gross outflows last year, there were also ~$15bn of gross inflows. Much of the pain is concentrated in a category of large diversified mature funds who grew to scale 10-15 years ago and who are now in mature run-off. There are a significant number of newer funds with either an innovative product design, an engaging customer-centric marketing model or strong performance who are showing real flow success. Digging behind the headline numbers reveals a more nuanced picture.

 

In summary, the Retail managed funds market is showing welcome signs of improvement – but we are a long way from the rising tide experienced from 2000 to 2006 that lifted just about every asset class and most asset managers. While industry & government super funds gain market share relative to their Retail Platform counterparts in workplace super and SMSFs continue to grow in the personal super & retirement space, it maybe sometime before we see a return to these glory days for managed funds.

Competition for flows is likely to remain intense, but stand-out investment performers, successful product innovators and managers with large aligned adviser distribution networks are being rewarded.

Chris Hurst, Principal Consultant

Michael Toh, Consultant

 

¹Retail Managed Funds refers to Managed Investment Schemes (MIS) issued by Australian asset managers. These managed funds gain indirect superannuation & non-super investment via retail platforms and directly by retail investors. The FUM/Flows do include a proportion of institutional investors – the Tria Retail Managed Funds Review seeks to identify and isolate this where possible.

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