Investor optimism premature, fund flows in firing line

While investor sentiment has improved since Liberation Day, geopolitical and tariff uncertainties will continue to deteriorate fund flows for asset managers, Morningstar predicts.

The latest Industry Pulse shows how fund manager flows dwindled in the March quarter and are expected to remain more volatile compared to 2024.

"Uncertainty stemming from US tariffs - reflected in ongoing trade negotiations, the risk of policy reversals, corporate disruption from supply chain realignments, and the potential for interest rates to remain elevated - heightens the risk of earnings shocks that could dampen sentiment," Morningstar equity analyst Shaun Ler said.

Investors are becoming more optimistic since early April, when US President Donald Trump announced a barrage of tariff hikes, as their appetite for risk assets, including equities, showed signs of recovery.

"However, we still expect fund flows to moderate over the medium term. The average price/fair value multiple for stocks covered by Morningstar Equity Research globally increased to 0.96 in May 2025, from around 0.90 during early April 2025," Ler said.

"While this rerating usually signals improving fund flow expectations, tariff uncertainties and the potential for earnings shocks or economic slowdowns pose downside risks to sentiment."

Total shareholder returns for most ASX-listed asset managers have lagged the S&P/ASX 200 Index since 2022, when interest rates began rising from historic lows.

For shares to gain momentum, Ler said lasting improvements in fund flows and operating margins are needed.

Most ASX-listed asset managers have also underperformed the ASX 200 Total Return Index since the start of 2025.

Challenger is the only exception and outperformer. Ler said this likely reflects investor optimism on the potential for improved margins.

Meanwhile, GQG Partners is broadly tracking the index, while others are underperforming due to firm-specific issues such as weak flows or waning corporate interest from suitors, he added.

Overall, the active managers in the coverage "lack the consistent outperformance needed to recapture market share lost to ETFs and industry funds."

"Most deliver only average peer-relative returns. Even GQG - despite a stronger long-term track record-faces near-term challenges, demonstrating the difficulty to consistently outperform. Competition remains intense, and firms will need to improve investment performance, realign incentive structures, pursue strategic partnerships, or increase investment in distribution to defend market share," Ler said.