Morningstar: European Funds Suffer Record Outflows in March

April 23, 2020

While investors reacted to the spread of the coronavirus with a certain sluggishness in February 2020, COVID-19 wrought havoc in Europe's fund market in March. According to Morningstar's net flow estimates, Europe-domiciled long-term funds suffered record outflows of EUR 246 billion during the month, a staggering number that dwarfs even the darkest month in the 2007-09 financial crisis, when EUR 108 billion exited long-term funds in October 2008.

Highlights from the report 'Morningstar European Asset Flows Commentary' include:

• Europe-domiciled long-term funds suffered record outflows of EUR 246 billion during the month, a staggering number that dwarfs even the darkest month in the 2007-09 financial crisis, when EUR 108 billion exited long-term funds in October 2008.
• Bond funds shed an unprecedented EUR 140 billion— By a way of comparison, the previous monthly record for outflows was October 2008, when investors withdrew EUR 54 billion from fixed-income funds.
• Equity funds suffered outflows of EUR 56 billion, another record when compared with the previous low in January 2008, when investors withdrew EUR 46 billion from equity funds.
• With almost EUR 6.0 billion, UBS topped the list in terms of inflows within the active spectrum, marking the third consecutive month of positive flows. PIMCO suffered the highest outflows among active managers, shedding EUR 23.7 billion, the worst one-month period flow-wise for the American asset manager on record. These outflows largely came from its flagship fund PIMCO Income. Among the passive providers, Vanguard stood at the helm of asset gatherers with almost EUR 2.1 billion collected, and iShares suffered the highest outflows with EUR 7.1 billion.
• On top of these significant outflows, Europe's fund industry was hit by market depreciations that amounted to an asset drop of close to EUR 1 trillion for long-term funds. As per 31 March, assets in long-term funds dropped to EUR 8,214 billion, compared with EUR 9,490 billion one month earlier. When including money market funds, assets sank from 10,836 billion as of 29 Feb to EUR 9,509 billion at the end of March.

Bond funds shed EUR 140 billion, an unprecedented level. By a way of comparison, the previous monthly record for outflows was October 2008 when investors withdrew EUR 54 billion from fixedincome funds. The outflows were a mirror-image of the seemingly endless hunt for yield in the postfinancial-crisis era, which had fed funds focused on the riskier parts of the global bond markets. The highest outflows stemmed from global flexible-bond funds, global emerging-markets bond funds, and euro corporate-bond funds.

Equity funds suffered outflows of EUR 56 billion, another record when compared with the previous low of January 2008 when investors withdrew EUR 46 billion from equity funds domiciled in Europe. Global large-cap blend funds bore the brunt of the exit, followed by US large-cap blend and global emergingmarkets equity funds.

A closer look at equity fund investors' intramonth timing reveals that the lion's share of outflows occurred in the weeks ended 13 March and 20 March, when equities reached their nadir. In the subsequent market rebound, flows to equity funds were positive but reduced to a trickle, which suggests that losses for equity fund investors were for real.

Allocation funds suffered outflows of EUR 26 billion, which dwarfed redemptions suffered by mixedasset funds in May 2009 when outflows amounted to EUR 16 billion. The same holds true with alternative products, from which investors withdrew EUR 23 billion. In October 2008, the previous low, investors yanked EUR 12.7 billion from these regulated hedge funds.

Money market funds were not the products of choice for investors. These short-term vehicles, which are typically sought-after in a risk-off environment, shed EUR 41 billion, suggesting that investors hedged their bets outside of fund vehicles by accumulating cash in their bank accounts.

Commodity funds were the only large broad category that bucked the trend, thanks to the high demand for gold products.

On top of these significant outflows, Europe's fund industry was hit by market depreciations that amounted to an asset drop of close to EUR 1 trillion for long-term funds. As per 31 March, assets in long-term funds dropped to EUR 8,214 billion, compared with EUR 9,490 billion one month earlier. When including money market funds, assets sank from 10,836 billion as of 29 Feb to EUR 9,509 billion at the end of March.

Active Versus Passive

Funds' rout in March was an all-market phenomenon that did not spare index funds, which were beneficiaries in the bear markets of 2008 and 2011.

Long-term index funds shed EUR 28 billion in March, by far their highest outflow seen in a one-month period. Passive equity funds suffered redemptions of EUR 11.3 billion, and fixed-income index funds haemorrhaged EUR 18.2 billion. Inflows of EUR 2.9 billion sent to commodity products—mainly gold exchange-traded funds and exchangetraded commodities—mitigated the pain to a limited degree. Long-term actively managed funds suffered outflows of EUR 218 billion, while active fixed-income funds saw EUR 121 billion walk out the door. Actively managed equity funds shed EUR 45 billion, allocation funds saw redemptions of EUR 26 billion, and alternative funds suffered outflows of EUR 22 billion.

Because of the huge outflows and significant market-depreciation effects, the market share of index funds rose from 18.8% per 29 Feb to 19.2% of all assets in long-term funds domiciled in Europe per 31 March.