Research from Thomson Reuters Lipper has revealed investors were selling out of actively-managed equity funds and going for exchange traded funds (ETFs) instead last year, as they looked for more short-term ways to take a view on the market.
The year saw European investors redeem some €43.7bn from active equity funds, while their passive peers took in €15.5bn over the period, marking a reversal in investor preferences.
Lipper data shows that this pattern holds true for the majority of its global classifications available in the European market (75 out of 107 categories saw a similar pattern of net inflows and outflows).
But Lipper focuses particularly on US and European equity exposures, which showed an interesting trend: relatively high net outflows from actively-managed funds, while ETFs enjoyed inflows.
The research firm speculates this could be due to investors withdrawing money ahead of the political votes that took place in the UK and the US over the course of 2016, but starting to tentatively gain exposure again to take advantage of the upside in markets.
Detlef Glow, head of EMEA research at Thomson Reuters Lipper, said: “I would assume European investors reduced their strategic exposure in actively managed products to the two markets prior to the Brexit vote in the United Kingdom and the presidential election in the United States and then bought back into the markets to take profits from a tactical move.
“This would mean European investors did not necessarily prefer ETFs by default. Rather, they made a tactical asset allocation decision and used products suitable for short- to medium-term trading, instead of buying into products with a long-term investment approach that may have not delivered a good market return over the short- to medium-term horizon.”
However, Glow admits the pattern could also point to a more profound shift in investor behaviours – it could mean they are selling active funds and replacing them with cheap passive products which have gained traction.
His overall conclusion is that ETFs are becoming widely accepted and used by European investors and could become a threat to active managers.
“I strongly believe the competition for net inflows in Europe will increase further over the coming years,” he said. “That will be good for investors, since it should further increase the pressure on costs and performance of actively managed funds.”
The equities space is not the only area where passives are gaining traction; bond ETFs are also becoming more popular with investors as they look for cheaper and more nimble ways to play fixed income.
Last year saw inflows of $114bn into the space, globally, and January saw bond ETFs take in another $16.6bn (according to BlackRock). Meanwhile, many active strategic bond managers have delivered lacklustre returns lately, giving investors further impetus to turn to passive products.
