02 Nov Who’s hot or not in the Funds of Funds world?
The trend for outsourcing investment has grown sharply in recent years, and with the advent of pension freedom it is only going to get bigger. Model portfolios and robo-advice are currently the talk of the town, but in the background funds of funds have been hoovering up assets.
According to Fundscape’s latest report Deconstructing the UK Funds of Funds World, FOF assets may only represent 12% of the total fund industry AUM (June 2015), but they punched well above their weight with 52% of industry sales in H1 2015. So in short, it pays to be part of this expanding market.
Funds of funds
In June 2015, there were a total of 78 third-party funds of funds managers in the UK, running 507 funds of funds between them. The largest players are Jupiter and Schroders who together account for 24% of the sector (down from 28% previously).
Concentration stalks the sector. The top five funds of funds managers in the UK accounted for just over half of all funds of funds assets, but in terms of net flows, they accounted for a whopping 150% of total net flows between January 2014 and June 2015… so it pays to be in the right funds.
Despite the dominance of established players, the leading players by sales were 7im and Hargreaves Lansdown. Both are examples of the changing distribution landscape. For 7im, its cost-effective solutions are popular with both advisers and consumers, particularly the passive-based funds. For Hargreaves Lansdown, its captive distribution channel and highly effective marketing techniques have helped it to capture significant flows.
Overall, there are some large, well-established third-party funds of funds. The largest is the Schroders Institutional Diversified Growth fund with just under £6bn in assets, which is a popular choice via DC platforms, so it tops the charts for net sales. Next in size is the Jupiter Merlin Income fund with just over £4bn as of June 2015, giving it a market share of 6.4%. However, it has faced stiff competition from other funds of funds, and a result, has seen assets shrink by almost 20% in the past two years.
Punching above their weight in the net sales charts were the HL Multi-Manager Income and Growth and the 7im AAP Balanced funds. Along with the Schroders fund, these funds accounted for 56% of net sales. Overall, the net sales ranking highlights the trend towards cost-effective solutions and the benefits of access to distribution.
We analysed the holdings of the top 100 funds and aggregated assets for each underlying investment. Our analysis found that were a total of 421 underlying funds by 119 groups. Ironically, for an industry that prides itself on diversification, there is substantial concentration. Five underlying fund managers dominate with 33% of total assets (down from 36% previously). HSBC, BlackRock and M&G topped the rankings of leading underlying fund groups, between them accounting for 23% of assets.
Concentration was less of an issue in terms of individual funds and there were some surprising findings, although it was no surprise to see that the largest and most popular fund was the Woodford Equity Income fund which has gone straight to the top of ranking. Findlay Park American and Artemis Income were second and third.
However, in terms of the number of funds of funds that are invested in funds, it was the Majedie UK Equity that topped with 17 funds of funds mandates, followed by the Henderson UK Property fund.
We have three scenarios for the growth of external funds of funds. All three assume that external funds of funds will continue to play a central role in the delivery of investment products to retail investors.
The realistic outlook takes into account the more uncertain environment globally, but assumes that economic conditions will progressively ease over the five-year period. It also assumes that the Eurozone will continue in its current form without any members leaving the currency, although uncertainty may persist. In this scenario, funds of funds assets are projected to grow at a compound annual growth rate (CAGR) of 19% to £170bn by 2020.
Taking a pessimistic outlook, we expect external funds of funds assets to grow at an average compound rate of 14% over the next five years, while growth for in-house funds of funds will be at a rate of 11%. Economic factors have a greater impact in this scenario and it allows for geopolitical concerns and resulting global economic weakness to weigh more heavily on the industry as a whole. A Brexit is also much more certain in this scenario. In this scenario, funds of funds assets are projected to grow at a compound annual growth rate (CAGR) of 14% to £134bn by 2020.
Taking an optimistic outlook, we expect external funds of funds assets to grow at an average compound rate of 24% over the next five years, rising to £213bn. Economic recovery will be faster and asset growth will be predicated on strong flows as well as performance growth. Global economic growth will be less patchy and more consistent. Closer to home, recovery in the Eurozone and the UK will be marked, with the periphery countries in particular benefiting from leaner, less bloated economies.
To find out more about the fascinating UK Funds of Funds market, contact us on firstname.lastname@example.org or +44 (0)20 7720 1183. Alternatively you can download the table of contents and exec summary here.