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Although the active versus passive debate has been around virtually as long as mutual funds have existed, active fund houses in Europe have been subject to considerably more scrutiny over the last 12 months.

The recent interim FCA Asset Management Market Study in the U.K. highlighted some key points on the ability of the active fund industry to add value. Previously, a statement by the European Securities and Markets Authority highlighted the issue of “closet tracking,” which presented some active fund participants in an unflattering light.

The ongoing debate on the merits of active investing versus passive investing will undoubtedly fill many more pages of academic- and industry-related literature. However, two things are certain: Active fund managers have to prove their worth with repeatable out-performance, and investors are sovereign – they invest where they see the best value and results.

What do fund flows reveal?

Since 2004, European fund assets historically have been dominated by active funds. According to Thomson Reuters Lipper data, the average annual percentage of active fund assets under management (AUM) has been 92% of overall AUM.

Exhibit 1. Historical Assets Under Management of European Mutual Fund Market (€ billion)

2017 03 09 lipper 01

Source: Thomson Reuters Lipper

However, this average has decreased materially since 2011, with passive investments constituting a higher percentage of AUM. For 2004, passive investments constituted only 5% of total European mutual fund AUM. For 2011, this figure had increased to 8%, for 2014, 10%, for 2016 passive investments constituted 12% of AUM.

The growth of passive investing can be seen clearly in the analysis of net flows, with 2016 proving to be the most fruitful year for passive product providers in Europe yin 13 years, despite total net flows reducing from from 2015.

Exhibit 2. Estimated Net Flows into European Mutual Fund Market

2017 03 09 lipper 02

Source: Thomson Reuters Lipper

Are we at a turning point?

It is difficult to assess all the drivers behind the growth in passive investing. Relative performance is key as is cost, with investors being much more savvy at seeking a good deal. There has also been a considerable increase in the amount of exchange-traded fund (ETF) products and providers now available in the market.

The regulatory pronouncements mentioned above also provide a fertile backdrop for the passive fund industry in Europe but there are also a number of other factors (covered in some detail in ), including asset allocation decisions, which may contribute to varying degrees.

Irrespective of the rationale, the last three years have undoubtedly been good ones for the passive fund industry in Europe. Indeed, 2016 represents the best year yet. Whether this is a structural trend is difficult to say, but the onus is definitely on active fund managers to respond to this challenge if they are to maintain their primacy in the industry.

Jake Moeller

Jake joined Thomson Reuters Lipper in 2013 as Head of UK & Ireland Research. He has over eighteen years experience as an expert in mutual fund research, fund-of-funds portfolio management and asset allocation strategies. He spent six years managing the fund-of-funds suite and guided fund platform at AIG and has been a mutual fund research specialist for Lloyds Banking Group, Towry and the Commonwealth Bank of Australia. Jake is a Chartered Member of the Chartered Institute of Securities & Investment (CISI) and a Senior Fellow of the Financial Services Institute of Australasia (Finsia).

Website: lipperalpha.financial.thomsonreuters.com/contributor/jake-moeller/

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