Investors prefer to pump new money into funds based on the strength of their one-year track records rather than over a longer time frame, new research from Lipper FMI shows.

Lipper, which researched the links between funds and distributors of such products, said that when it compared cross-border European equity funds’ performance with their sales, it found that in 85 per cent of the time periods assessed, first quartile funds achieved the greatest net sales based on one-year performance.

This proportion, however, fell to 75 per cent for 3-year performance and virtually disappeared for 5-year performance, with the proportion falling to just 33 per cent, Lipper FMI said.

“Apart from the initial sales activity when a fund is launched, a stellar one-year performance record is virtually essential in order to generate significant inflows,” the report said.

The data suggests that investors can be easily swayed by a 12-month track record, even though recent market turmoil suggests that it makes more sense to see how well a fund has performed over a longer span of time. The data may also show how effectively fund companies can make use of recent performances in their sales and marketing literature.

The report also noted that sales can be concentrated among relatively few funds, suggesting there are too many funds in what is still a heavily fractured European market. For example, Lipper FMI found that for 10 of the most popular sectors in 2009, on average over one third of annual net sales flow into a single fund. 

The largest groups (with over 60 funds each) attract an average 71 per cent share of net sales each year, the report said.

Taking last year’s most successful fund category of European corporate bond funds, the most successful fund in the sector took net sales of €7.1 billion, 34 per cent of all sales in that category; the next four most successful funds accounted for a further 42 per cent of fund sales.

“It is difficult to see how large cross-border companies can reduce the size of their fund ranges while still maximising opportunities to build relationships with different distributors in different markets,” it said.

Annual fee levels for cross-border funds continue to rise for retail investors, but are falling for institutions, it said.

Latest figures from Lipper FMI showed that for retail funds, management fees were 1.58 per cent, up from 1.38 per cent in 1999; for institutional funds, management fees have fallen to 0.85 per cent from 0.99 per cent.

“No evidence has come to light in Europe that a significant proportion of retail investors are motivated by annual fee levels. However, institutional investors are much more likely to push for better times and the size of their investments obviously gives them greater clout to achieve this,” the report said.

“The way funds are distributed in Europe has played an important part in the rise in funds’ fee levels for retail investors.  The evolution of the active versus passive product mix in fund ranges, the rise of UCITS III alternative strategy funds, and the likely opportunities with UCITS IV, all suggest that discussion of fee levels is hotting up.  But it will take seismic shifts for the asset manager-distributor dynamics outlined in this report to change,” said Ed Moisson, author of the report and head of consulting at Lipper FMI.

Lipper FMI is a Thomson Reuters company.