Have investors favored active funds or ETFs in 2021? Did they prefer active funds or ETFs to invest in sustainable funds? What about flows to traditional funds?

A regular and optimal analysis of all active funds and ETF flows in Europe, made from the proprietary database of BSD Investing * and data from Morningstar allows these questions to be answered. A new-look in the world of portfolio management.

What should we remember about flows in the fourth quarter of 2021?

Flows in the fourth quarter of 2021 were again down compared to the previous quarter in a more volatile context. Total flows decreased by 12% compared to the third quarter. Flows to equity funds (assets and ETFs) slightly increased, 7% compared to the third quarter of 2021 to stand at € 65bn. Flows to bond funds were down 32% over the quarter, following the announcement in November of the reduction of the purchase program of the FED and expectations of rate hikes.

In the fourth quarter of 2021, were there any differences between asset classes?

Investors remained cautious as inflation fears and expectations of rate hikes increased. Flows to active equity funds stayed at € 39bn, their lowest level of the year. Fixed income flows to passive funds reached their lowest level of the year at €55bn. Active fund flows decreased by 18%, while passive flows increased by 7%. It is the sustainable funds that continue to be favored by investors. Flows to these funds increased by 16% over the quarter. They represented 70% of total flows vs 58% on average over the year.

And what about the flows over the whole of 2021?

2021 was a record year in Europe for inflows supported by solid fundamentals, despite uncertainties about the development of inflation and interest rates. In total, flows more than doubled compared to 2020 and reached € 819bn, 8% above 2017 previous record. Equity funds captured 45% of inflows. Flows toward those funds were up 75% compared to 2020. The good performance of flows also concerned bond funds, whose flows increased by 58% compared to 2020.

Active funds captured the majority of flows in 2021

In 2021, active fund flows in Europe have been multiplied by 2.5 compared to 2020 to reach €613 billion. They were helped by the good performance of the financial markets, despite the increase in volatility at the end of the year.

• On the equity markets, active equity funds remain the big winners in Europe: €248bn collected, 66% of flows to equity funds.
• On the bond markets, flows to active funds are up 71% compared to 2020 to €192bn, 75% of total bond flows.

Flows toward ETFs in 2021 were above those over the whole of 2020

• On the equity markets, with €123bn in flows for passive management, 2021 surpassed 2020 (€ 93bn) and the record of 2017 (€112bn).
• On the bond markets, passive management flows remained strong at € 80bn, 33% above those of 2020.

Sustainable flows have continued to rise sharply, with the majority of those flows going to active funds.

Over the year as a whole, sustainable flows showed an increase of 59% compared to those for 2020 to reach €476 billion. More than half of European mutual funds flows were sustainable. The search for meaning and impact, particularly in the context of the fight against global warming, as well as the awareness of the need to take into account a wider range of long-term risks in portfolio construction following the Covid-19 crisis, pushed investors towards sustainable assets. Active management collected €356 billion, i.e., more than 75% of these sustainable flows.

Flow growth in 2021 also concerned traditional funds

In addition to the growth of sustainable flows, flows toward traditional active funds (excluding sustainable funds) also experienced a strong rebound sustained by the high level of liquidity in the markets and the search for flexibility in a changing post pandemic environment. Investors were attracted by the flexibility of active managers to adapt to the changes associated with this new situation and to select the best companies while avoiding the worst. Inflows in this segment, reached €257bn in 2021, vs €58bn in 2020.

The share of sustainable funds in ETFs continued to grow

The flows toward sustainable ETFs were also very strong, with €120bn in 2021. They reached a historical record, twice the level of 2020.

Sustainable investments represent a growing share of ETF investments: 75% of equity ETF flows and 35% of bond ETF flows up compared to 2020 respectively +92% and +155%. Sustainable ETF offer is constantly expanding, especially on the fixed income front. Passive investing is leading on the innovation front for sustainable investments, with new indices targeting decarbonization or climate change that can significantly influence companies to align with sustainability principles.

What to remember from the 2021 flows to improve portfolio construction?

The study of 2021 flows in Europe reveals that flows have increased significantly to both active and passive funds in the post-pandemic era thanks to the continuation of very accommodative monetary policy. The search for sustainable investments and flexibility in a changing environment has led to a strong rebound in active management after many difficult years. For their part, passive funds continued to experience strong growth. The current environment has brought back to the fore the differentiating role of each investment style in building optimal portfolios and outperforming.

*Sources: BSD Investing & Morningstar. Data as of 31/12/2021.