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The investment funds market

Many fund managers and investors believe the market cycle has peaked. This suggests there will be higher demand for more defensive and market-neutral investment strategies going forward. That notwithstanding, increased optimism and greater risk-taking was seen among investors in 2019 . Differences between the real economy and share performance were clear in this year’s stock market upturns, leading to challenges for many active managers.

The equity and fixed income markets

Towards the end of 2018, the stock exchanges had plunged and the market was worried about a global economic slump driven by trade wars and rising interest rates. Thanks to a sharp turnaround by the us Federal Reserve in the final days of the year, however, the beginning of a very strong stock market year in 2019 was distinguished by a striking reversal of the trend. The fact is that most equity markets around the world pointed upwards in 2019. On average, the value of equity funds, measured in sek, rose by 29 percent. Sweden funds demonstrated average value growth of 34 percent, while global funds rose on average by 30 percent, according to the Swedish Investment Fund Association. Hedge funds, whose strategies are to generate returns regardless of stock market conditions, generated better returns on average than in the preceding year. However, performance was not in line with investors’ expectations and returns underperformed several other indices, leading to continued challenges for the segment.

Distinct differences

Due to strong stock market performance, most savings strategies were successful in 2019. Momentum strategies – investing in stocks in a rising trend, even if they would from a fundamental manager’s perspective be considered over-valued – were particularly successful for investors. It was difficult for even the most active managers to predict market trends, partly because the difference between the real economy and share prices widened considerably during the year. Warning signs of an approaching recession never went away, but share savers chose largely to ignore them. The result was a highly positive stock market year, especially for companies and sectors that investors considered less sensitive to cyclical changes in the economy. Generally speaking, defensive companies and high-growth companies in the us performed very well. In the Nordics, property companies contributed, as did defensive companies, such as those oriented towards the cyclically stable food industry, to clear upturns. Towards the autumn, however, investors’ risk appetite also increased for cyclical companies. This was triggered by an at least partial agreement between the us and China in the protracted trade conflict.

Challenging situation for hedge funds

In spite of global value growth, 2019 was a difficult year for hedge funds. The Preqin All-Strategies Hedge Fund benchmark reported an increase of 11.45 percent during the year, a significant improvement from the previous year’s negative return of -3.06 percent Alongside this, 40 percent of investors believe that hedge fund performance in 2019 fell short of their return expectations and the highest global net withdrawals from hedge funds since 2016 were recorded during the year, adding up to usd 82 billion. It has become more challenging for managers to launch new hedge funds – the number of launches in 2019 was about half as many as in the preceding year. The number of liquidations exceeded the number of new launches and the trend shows a consolidation of the industry. Challenges in the market are imposing new demands on hedge fund managers to adapt and revitalise. One sign of this is that more managers are using artificial intelligence and machine learning technologies to improve operational efficiency and boost returns. The increased pressure brought to bear on hedge fund fees is another. Several new funds revised their fee structures in 2019 to attract new investors. According to the Preqin market survey, a clear majority of fund managers and investors believe we are now at the peak of the market cycle. This presages higher demand for more defensive and market-neutral investments capable of delivering risk-adjusted returns with low volatility. A full 79 percent of investors surveyed reported that they planned to increase or maintain their allocation to hedge funds in the next 12 months. Compared to 2018 , investor interest in market-neutral equity strategies has increased the most, but macro-strategies that generate returns based on macroeconomic conditions are also seeing higher demand.

Record-breaking fund assets

The Swedish stock exchange rose by nearly 35 percent in 2019 – the highest annual return in ten years. Swedish fund assets climbed during the year and topped SEK 5,000 billion for the first time, according to the Swedish Investment Fund Association. The increase from the end of 2018 thus became more than sek 1,000 billion, about 950 billion of which was due to value appreciation. According to the Swedish Investment Fund Association, the majority of new Swedish investments for the year were made in long-term fixed income funds and equity funds. The greatest net inflow among equity funds was in global funds, followed by sector funds. In contrast, there were net withdrawals during the year from Europe funds, Nordic funds, North America funds and emerging markets. The popularity of passively managed funds also grew, resulting in outflows during the year from active, locally managed funds.

Investors in funds sought safer investments

The Swedish investment funds market is still dominated by four major banks, but their dominance is waning along with the success of independent fund managers, both foreign and domestic. In addition, digitalisation is still presenting opportunities to widen direct distribution to the consumer market via established digital platforms as well as proprietary channels. At the end of 2018, total fund assets in Sweden amounted to sek 3,978 billion, down sek 40 billion from the previous year, primarily due to weak performance in the equity market. As market turbulence accelerated, investors in funds chose to put their money into safer investments. New investments in funds during the year amounted to sek 54.4 billion, mainly comprising net deposits in short-term fixed income and mixed funds. A net outflow of sek 6.8 billion was posted in equity funds, where the largest withdrawals were taken from Swedish equity funds, amounting to sek 27.7 billion net. The net outflow from European equity funds was sek 10.7 billion. In contrast, there were large net deposits to global funds and new investments during the year in these funds amounted to sek 39 billion according to the Swedish Investment Fund Association.

Regulatory changes 

The market for advisory services and fund distribution underwent changes in 2018 due to eu regulations (MiFiD II). Higher demands for transparency concerning product prices, distribution costs and payments in connection with advisory services are meant to make it clearer to customers what they are paying for. The transparency makes it easier for investors to evaluate fund management. It also means that funds that generate good risk-adjusted return and charge competitive fees will benefit over time. The trend shows that fund charges in Sweden have fallen in recent years and that annual charges for funds registered in Sweden are on par with the rest of Europe.