Foreign investors, notably those from the US, Hong Kong and Singapore, have become the most significant buyers of EU investment funds, according to fresh industry data released by Brussels-based fund and asset management industry association Efama. Describing Europe as an “uncontested giant in global fund distribution,” Efama however warned that Europe should not become complacent.
Foreign investors, on average, poured 276 billion euro annually over the past five years into European funds. In comparison, 174 billion euro was sold cross-border within the EU, and 196 billion euro was purchased domestically, according to Efama.
The European investment fund industry benefits significantly from foreign investors, according to Efama. As of 2023, European funds managed approximately 6,000 billion euro on behalf of non-EU investors, representing about 30 percent of the total assets under management in the EU fund sector.
- Large funds on the rise: Ucits funds with over one billion euro in net assets are increasingly dominating the European investment landscape, while smaller funds see a decline in market share.
- Cost down on efficiency gains: The average costs for active and passive long-term Ucits have consistently decreased from 2019 to 2023, driven by greater transparency and intensified competition.
- European Ucits in US equities surge: The allocation of US stocks within European Ucits has doubled over the past decade, reflecting the robust performance of US tech giants and growing international investor demand.
Over the past decade, subscriptions by non-EU investors have consistently contributed a significant share of inflows into European funds. Since 2018, these subscriptions have accounted for at least 35 percent of annual net sales, helping to compensate for lower sales to European investors in certain years.
Non-EU investors accounted for half of net sales in 2023
Non-EU clients investing in European funds pay substantial annual management fees on their investments. While exact figures are difficult to determine, Efama estimated that non-EU investors contribute ”tens of billions of euros” annually to the European fund ecosystem through these fees.
Headwinds for global fund distribution
Efama warned that Europe should not become complacent over its status as global leader, noting headwinds for the international distribution of Ucits funds. Some jurisdictions, like the United Arab Emirates, have banned direct distribution of such funds to retail investors, while other, more developed countries like the UK, Switzerland, Hong Kong, Singapore and Japan, try to make their local funds more competitive.
“This is notably the case in Hong Kong, where there have been no net registrations for at least a couple of years,” Efama said, highlighting the need for “a degree of stability” in the EU’s regulatory framework. “New policy initiatives can result in unforeseen effects abroad and raise questions as to whether the EU’s framework still serves the best interest of non-EU investors.”
Larger funds now more prominent
Efama’s fact book also presented a number of other findings. Among these, it concluded that large investment funds are becoming increasingly important in the European investment landscape.
In 2023, Ucits funds smaller than 100 million euro accounted for less than four percent of the total net assets of Ucits, with their market share gradually decreasing. Meanwhile, the share of funds with more than one billion euro in net assets continues to grow. This trend underscores the shifting dynamics within the investment fund market, favouring larger funds.
Size matters
Efama attributed the increased importance of large funds to the advantages they offer, including economies of scale, which can lead to lower costs and enhanced performance due to more significant resources and better access to information.
Declining costs
The report highlights a consistent decrease in the costs of investment funds over recent years. Between 2019 and 2023, the average cost of active long-term Ucits decreased from 1.16 percent to 1.06 percent, while the cost of passive long-term Ucits fell from 0.23 percent to 0.21 percent. This decline in costs is expected to persist, Efama said, referring to greater transparency in fund fees and intensified competition among asset managers.
Efama also noted a reduction in the costs associated with Money Market Fund Ucits, which fell from 0.17 percent in 2019 to 0.10 percent in 2021, before rising slightly to 0.16 percent in 2023. These charges remain low compared to other long-term funds .
Moreover, the costs for multi-asset Ucits decreased from 1.30 percent in 2019 to 1.18 percent in 2022, though they edged up again to 1.21 percent in 2023 . This trend of declining costs is also observed in bond Ucits, where active bond Ucits saw their charges reduce from 0.77 percent in 2019 to 0.67 percent in 2023, and passive bond Ucits from 0.22 percent to 0.18 percent over the same period.
This overall decrease in costs is attributed to factors such as increased competition, the rise of passive investing, and technological advancements that drive down operational expenses. The reduction in fund costs enhances their attractiveness to investors by improving the net returns, making them a more appealing investment choice .
Passive Ucits and ETFs win market share
Furthermore, the report emphasised the growing market share of passive Ucits, which rose from 11 percent in 2013 to 26 percent at the end of 2023. This shift is driven by the lower costs associated with passive funds and the increasing demand for ETFs, which often have substantial assets under management and benefit from similar economies of scale as large active funds.
Efama’s fact book also revealed that the net assets of Ucits and AIFs have doubled over the past decade, reaching a substantial 20.7 trillion euro in 2023. This growth underscores the robustness and appeal of the European fund industry, according to Efama.
Ucits ETFs in demand, non-ETF out of favor
Last year was a landmark year for ETFs, with Ucits ETFs attracting 169 billion euro in net sales, while non-ETF long-term Ucits experienced net outflows of 155 billion euro. This shift highlights the growing preference for ETFs among investors.
Active ETFs still only small part of market
Efama noted that while active ETFs currently occupy a small niche within the broader European ETF market, their development reflects a trend towards greater diversity and innovation in investment products.
Net fund assets rose 9% last year
The vast majority of ETFs still are are passive funds designed to track an index, but there has been a notable development in the creation of active ETFs in recent years. As of the end of 2022, active ETFs still represented only a small fraction of the total European ETF market, accounting for just 1.6 percent of the market, Efama said.
Active ETFs differ from their passive counterparts in that they are managed with the goal of outperforming a benchmark index through active decision-making rather than simply replicating the performance of an index. Despite their relatively small market share, the report highlights the growing interest in active ETFs due to their potential to offer higher returns through active management strategies.
Moreover, Efama noted rapid growth of the ETF market in general, with net assets increasing from 900 billion euro in 2019 to 1.6 trillion euro by the end of 2023. This growth is indicative of the increasing popularity of ETFs, including the nascent segment of active ETFs, which benefit from the flexibility, liquidity, and cost efficiency that characterise ETFs as a whole.
Allocation to US stocks doubled
The allocation of US stocks within equity Ucits has doubled from 22 percent to 44 percent over the past decade, driven by the strong performance of US stock markets, particularly large US technology stocks, according to the fact book.
European equity Ucits prefer US assets
This trend is largely driven by the consistent outperformance of US stock markets compared to European markets, particularly due to the substantial growth of large US technology companies, Efama said. These tech giants have become a dominant force in global indices, making US equities an attractive investment for funds aiming to capitalise on high-performing sectors.
Additionally, Efama noted that the global success of the Ucits brand has attracted substantial international investments into funds that often track global indices with a heavy weighting towards US equities. This increased demand from international investors has further boosted the representation of US stocks in European Ucits equity funds.