A Special Report is content that is edited and produced by the Special Reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report, but who do not have editorial control.

A very healthy outlook

Strong prospect of global growth for funds and almost all investment asset classes

‘Despite the very strong growth in the market, there is more consolidation to come,’ says KPMG asset management practice leader Brian Clavin. Photograph: Getty Images

‘Despite the very strong growth in the market, there is more consolidation to come,’ says KPMG asset management practice leader Brian Clavin. Photograph: Getty Images

 

With the equity markets continuing their bull run, the Eurozone in strong recovery, and the world seemingly shrugging off the uncertainties created by Brexit and the febrile political atmosphere in the US, the outlook for funds growth in 2018 and beyond is very bright indeed.

“We have had a number of years of really good solid growth and I don’t see it stopping any time soon,” says KPMG asset management practice leader Brian Clavin. “It’s also been a very good period of growth for funds industry in Ireland. People are looking for more diversification, more cross-border and there is a greater desire for different types of products.”

Consolidation is also a feature of this growing global market, however. “We are seeing a much broader range of products from a smaller number of providers,” he notes. “Despite the very strong growth in the market, there is more consolidation to come. Firms have to adopt new technologies like blockchain and robotics and these are very expensive. This is having a massive effect. So is regulation. We are seeing much more complex products in more tightly regulated markets and this is driving consolidation as well.”

Kerill O’Shaughnessy, investment funds partner at Walkers, also notes an increase in the range of fund products. “2017 was a strong year for equity-focussed and credit fund launches,” he says. “UCITS fund establishments were spread across a broad range of strategies, including traditional long-only strategies, high-yield debt and multi-asset investing UCITS, as well as a range of more complex alternative and structured UCITS funds. We also saw increased use of master-feeder structures, some involving Ireland’s Irish collective asset-management vehicle or ICAV.”

Master-feeder structures will in all likelihood continue to grow in popularity with investment managers owing to their ability to meet the needs of investors in different jurisdictions. For example, one master fund can have feeders catering for investors in the EU, the US and other jurisdictions but will invest their funds collectively and distribute returns to the feeders which in turn distribute them to the individual investors. This reduces considerably the complexity of the investment process while at the same time making a wider range of investments available on a very cost-efficient basis.

The big growth story for the coming years is likely to be exchange traded funds (ETFs), however. This is in line with the general trend towards passive investing which is driven by a desire by investors to reduce costs and increase the transparency of their investments.

ETFs track an index such as a stock exchange, a commodity like oil, bonds, or a basket of assets like an index fund. They are traded on stock exchanges and therefore offer higher liquidity than mutual funds and typically involve lower fees as well.

ETFs may only represent a small proportion of the global funds market – a recent Central Bank presentation put it at 8 per cent – there is general agreement that this is going to grow rapidly in the near term.

In the US alone, investment in ETFs totalled $464 billion (€388bn) in 2017, according to State Street Global Advisors, a massive increase on the $288 billion recorded for 2016. To put this performance in context, Credit Suisse put investment in US mutual funds at just $91 billion for the first 11 months of 2017.

The global story is just as impressive. Research firm ETFGI puts global ETF assets at $4.569 trillion, up $1.2 trillion in just a year. The rate of acceleration can be judged from the fact that growth was $522 billion in 2016 – massive but dwarfed by the 2017 outturn.