Time heals all wounds, right?
For many of us who were caught up in the storm of the Global Financial Crisis the 10-year anniversary of the collapse of Lehman Brothers is an anniversary that evokes mainly unpleasant memories.
The image of Lehman employees carrying out their belongings in cardboard boxes is forever seared in the memory.
It’s easy to forget the market carnage in UK and European mutual funds around that time.
According to Lipper data, pan-European bond funds haemorrhaged €500bn (£448.1bn) net by the end of 2008. It wasn’t until the end of 2013 that those outflows were recouped.
Equity funds saw net outflows of some €115bn for 2008, although they recouped those flows the following year.
Today, the pan-European mutual funds market has reached over €10.5trn of assets (at the end of 2008, assets under management were €4.3trn), with the UK constituting over a fifth of today’s assets.
Bond funds, which were so critically wounded after the Lehman collapse, have been the top-selling asset class for three of the last four years.
Although there’s a relative slowdown of overall fund flows for the year-to-date 2018, 2017 was a record year, with net inflows of some €757bn being the highest in over 15 years.
There has been a considerable structural shift in the funds we buy. Our love affair with passive investments is unabated.
For the last three calendar years, on average, the flows of passive investments as a total of all European fund flows is 24 per cent, and for 2018 year-to-date as of 31 May it’s nearly 40 per cent.
In the three years post-Lehman, this average was only 5 per cent.
Overall, too, fund costs are falling. At the end of 2017 the average total expense ratio for non-institutional equity funds in the UK had fallen 9 per cent from 10 years before. For bond funds the decrease was 15 per cent.
Other lessons have been learned. Bond fund managers place more emphasis on the analysis of credit ratings and the importance of covenants in high-yield instruments and loans.
Furthermore, they have not increased credit risk to boost yield.
In the flexible IA UK Strategic Bond sector, for example, the average fund exposure to investment-grade credit in 2008 was 61.5 per cent; today it is only marginally lower at 59 per cent.
Today, fund transparency and governance have become significantly more robust. Regulatory reforms are doing their job, and fund gatekeepers are more vocal.
The fund industry too knows that fund buyers are cannier, more demanding, and price sensitive. There are fewer cosy distribution free lunches.
As I write this, I have just received a legal update on the treatment of Ucits funds in light of Brexit.