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The investment funds market

The investment funds market is expanding in pace with savings growth. Trends such as ageing populations and the declining capacity of national governments to provide post-retirement income through publicly financed pension systems are driving this growth.

The investment funds market in Sweden

At year-end 2017, total fund assets in Sweden amounted to a record-high SEK 3,948 billion. New fund savings increased substantially year-on-year and totalled SEK 119 billion for the full year of 2017, the third-highest net inflow in a single year since statistics began to be compiled in 1994, according to the Swedish Investment Fund Association.

The largest net savings, each worth SEK 39 billion, were made in investment savings accounts and Swedish premium pension savings, followed by SEK 28 billion in endowment plans and SEK 21 billion in nomineeregistered fund savings. Net corporate savings amounted to SEK 20 billion in 2017. There was keen interest among Swedish households in saving in equity funds. Net inflows also continued for mixed funds during most months of 2017, while businesses primarily chose bond funds for their savings.

Swedish fund savings have gone from strength to strength ever since the widespread breakthrough of “public savings programmes” in the 1980s. Allocations to our pensions have become increasingly important in the current investment funds market. Since 2000, all working people in Sweden save in funds via the Swedish Pensions Agency and people can also choose to invest large portions of their occupational pension contributions in funds.

Although the Swedish funds market is still dominated by four large banks, this dominance has waned considerably over the last 15 years. This is due to the success of many independent fund managers as well as the digital advances that make it easier for new market entrants that do not have their own physical distribution networks. Competition from foreign fund companies is also increasing and many of the funds now offered in the Swedish market are registered abroad. Fund management charges in the Swedish market have fallen in recent years. The annual charges of Swedish-registered funds are now on par with the rest of Europe.

The market for advisory services and fund distribution is undergoing profound changes, in part due to new EU regulations (MiFID II) entering into force in 2018. Greater transparency concerning product prices, distribution costs and payment in connection with advisory services are meant to make it clearer to customers what they are paying for. This transparency makes it easier for savers to evaluate fund management. It also means that funds that generate good risk-adjusted return and that charge competitive fees will benefit over time.

In addition, digitalisation is presenting opportunities to widen direct distribution to the consumer market via established digital platforms as well as proprietary channels.

The global hedge fund market

Demand for funds of various types is influenced by global economic fluctuations as well as savers’ risk appetites and expectations for the future economy. World equity markets delivered stable development in 2017, but 2018 began with turbulence due to worry about rising inflation that could lead to faster than anticipated interest rate hikes.

Managers of hedge funds offer various strategies to generate positive return regardless of market developments. Unlike traditional funds, hedge funds aim to achieve stable risk-adjusted return in market upturns as well as downturns. To perform well in competition with large global hedge fund managers, it is important to demonstrate low correlation to the financial markets. Many institutional investors with a long-term perspective, such as life insurance companies and pension funds, seek alternative investments, for example, that make it possible to spread risk in a portfolio of more traditional assets like stocks and bonds.

After a year of net outflows from the hedge funds in 2016, the trend reversed in 2017. Globally, net inflow was almost USD 50 billion. This, combined with positive return, brought the value of the global hedge fund market to approximately USD 3,550 billion by the end of the year (November 2017).3

Multi-strategy funds recorded the highest net inflow during the year, at USD 24 billion. Trend-following strategies (CTA funds) were popular among investors and showed net inflows of nearly USD 23 billion, while macro strategy funds gained an injection of USD 17 billion during the year. In contrast, lower interest was noted for hedge funds with equity strategies, as manifest in a net outflow of about USD 33 billion from this type of funds. In spite of the outflow, the aggregate value of equity strategy funds rose by 8.6 percent to USD 894 billion since the end of 2016, due to a steep rise in value during 2017.

3) 2018 Preqin Global Hedge Fund Report.

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