Despite global securities markets enjoying a robust first half of 2024 and various investment categories capturing the interest of European investors, some segments failed to impress. Which asset classes, investment styles, and regions fell out of favor with investors?
At the asset class level, allocation funds faced a decline in popularity among investors. The category saw an outflow of over 41 billion euros in the first half of the year. Although this is not alarming given the total invested capital of over 1500 billion euros at the start of 2024, it marks the second-largest half-yearly outflow in absolute terms for allocation funds since 2007.
The largest outflow for the asset class, 52 billion euros, occurred in the last six months of 2023, bringing the total outflow over the past twelve months to over 90 billion euros. The outflow from allocation funds seems to have a more structural nature: since June 2022, there have been only three months where allocation funds managed to attract new capital. Investors have particularly turned away from more defensive allocation funds, while more aggressive bond funds have gained interest.
Liquid alternatives also continue to struggle to attract investors. Over the past eight quarters, investors have consistently withdrawn capital from these types of investment funds. This year, the outflow has reached over 6 billion euros, continuing the steady decline in assets under management for this class. Currently, investors have allocated 172 billion euros to these funds, nearly half of the asset peak achieved in 2018. The inglorious retreat of Abrdn Global Absolute Return Strategies, once managing nearly 40 billion euros and one of the largest funds in Europe, symbolises the decline of liquid alternatives and the challenge of convincing investors to invest in such strategies.
Although bond funds as an asset category have enjoyed significant interest from investors due to higher initial yields, some segments have been overlooked. In absolute terms, EMD funds have lost favor with investors, facing outflows of nearly 4.5 billion euros. Inflation-linked bond funds have also seen withdrawals.
On the equities side, the unpopularity of UK stocks remains notable. All five UK equity categories in the Morningstar fund database experienced net outflows in the first six months of 2024. Large-cap equity funds and dividend funds, in particular, struggled with declining investor interest. Since 2021, the large-cap category has only seen four months of inflows. Consequently, UK stocks have faded from investors’ radar.
Another notable trend is the withdrawal of European investors from sustainable investment funds. After years of strong inflows, interest in these strategies has taken a significant downturn, with the most sustainable strategies being hit hardest in the first half of the year. Funds with 5 Morningstar globes, a SFDR Article 9 classification, or those identified as low carbon strategies have seen the strongest outflows. Although the outflow is limited relative to the managed assets, a shift is evident. Article 9 funds have seen outflows every month since October last year, with the 2.8 billion euros outflow in June being the largest monthly outflow since the introduction of the SFDR framework.
The strategies that prominently appear on Morningstar’s radar possess a solid management team and a robust investment process, as judged qualitatively by fund analysts or attributed based on an algorithm evaluating funds using the same framework as the analysts. In this edition, we highlight a fund meeting these criteria and classified as Article 9.
M&G (Lux) Pan European Sustain Paris Aligned
M&G (Lux) Pan European Sustain Paris Aligned is deemed an attractive strategy by Morningstar’s fund analysts, focusing on investing in high-quality European companies while considering the goals of the Paris Climate Agreement. The strategy earns an Above Average rating for the People pillar and a High rating for the Process pillar.
John William Olsen has led the strategy since 2014. With over twenty years of experience, he began his career as a fund manager at Danske Bank, building a solid track record with both European and global mandates since 2002. Olsen is well-supported by a team of nine, and despite some turnover in recent years, the team remains well-equipped.
The process, designed and developed by Olsen, focuses on fundamental analysis to identify so-called compounders—companies with significant competitive advantages and sustainable business models—leading to a strong preference for quality. A key decision was to align the strategy in 2021 with the goals of the Paris Climate Agreement, focusing on companies with robust plans to reduce their CO2 emissions. This further strengthened the integration of sustainability factors into the original strategy. The portfolio is concentrated, with 25 to 35 positions, and has very low turnover.
Under Olsen, the strategy has delivered strong results, landing in the top quartile of the Morningstar Europe large-cap blend equity category in 2022, 2023, and the first half of 2024.
Jeffrey Schumacher is the director of manager research at Morningstar Benelux. Morningstar analyses and rates investment funds based on quantitative and qualitative research. Morningstar is one of the knowledge partners of Investment Officer.