Passive Funds Are Set to Continue Gaining Marketshare
January 15, 2021 — London
Active vehicles recover from market collapse, but consistent performance is needed
Passively managed funds weathered the market volatility of 2020, highlighting the need for active funds to deliver better and more consistent performances in order to slow the erosion of marketshare, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.
As it became clear that COVID-19 was spreading around the world, global equity markets fell by more than 30% in March, sparking unprecedented volatility for index-tracking funds and passive investors. Both strategies posted net outflows for the month. However, whereas actives lost 3% of starting-year assets under management (AUM), their passively managed counterparts lost only 1%, according to a global data provider.
“Although stock market declines early in 2020 tested passive strategies, the swift recovery in global equity markets meant there was little threat of an exodus to active vehicles. Cerulli expects passive funds to continue gaining marketshare in 2021,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates, a global research and consultancy firm.
Passive funds have been steadily growing net inflows in recent years. In response, instead of pitting active strategies against passive strategies in portfolio construction, the investment industry has shifted to more widely endorsing an approach that combines the two. Nevertheless, passive products continue to gain ground, helped by a track record of outperformance and falling fees.
Zumbo expects the growing demand for environmental, social, and governance (ESG) investments to drive demand for both active and passive funds. ESG mutual fund, index tracker, and exchange-traded fund (ETF) assets have all grown rapidly over the past five years. From 2015 to 2019, actively managed mutual fund assets grew at a compound annual growth rate (CAGR) of 15%, index fund assets grew at a CAGR of 34%, and ETF assets grew at a CAGR of 72%. Institutional investors have driven the growth of responsible investment assets in Europe. Since 2015, total institutional responsible investment assets, including those held in mutual funds and ETFs, have grown by 16.8% per year to more than €5 trillion (US$6.7 trillion), according to Cerulli’s estimates. In the retail investment market, Europe-domiciled mutual funds and ETFs passed €1 trillion in ESG assets in August 2020.
More than half (57%) of the ETF issuers in Europe that Cerulli surveyed identified the development of ESG ETF products as a top priority for their firms over the next two years. Several have launched innovative and highly specialized ESG value propositions.
ESG investments have favored active players and asset managers’ ESG integration approaches are evolving from simple exclusion (screening to avoid sectors such as alcohol, tobacco, and weapons) to a more systematic approach. This presupposes a high level of active management—for example, incorporating ESG factors into investment decision-making and employing stewardship practices to ensure that all financially material factors are included when assessing risk and returns. However, passives are increasingly gaining ground in this space. Passive ESG equity fund assets grew at a CAGR of 32% from 2015 to the end of 2019; active ESG equity fund assets grew at a CAGR of 17% over the same period. Some 73% of the ETF issuers that responded to Cerulli’s survey expect significant demand for ESG ETFs in Germany and 70% expect significant demand in Sweden and France.
- November saw a surge in net inflows to European long-term funds (both active and passive), which increased by 150% month-on-month to €68.5 billion. In Europe, expectations of a global recovery and positive vaccine news boosted equities, with the eurozone particularly likely to benefit, given its high exposure to global trade. The MSCI EMU index rose by 17% during the month.
- Equity funds recorded their best month of 2020 in November, with net inflows of €38.6 billion. Bond funds also had a positive month, gathering net inflows of €11.3 billion, whereas mixed-asset funds posted net outflows of €26.9 billion. Thematic funds attracted significant flows in 2020 and Cerulli is expecting the trend to persist in 2021. Some 95% of thematic funds are actively managed, but our survey found that providers of passively managed funds in Europe are predicting strong demand for thematic strategies.
- The U.K. mutual fund market regained some lost ground in November, attracting £1.1 billion (US$1.5 billion) of net sales during the month amid good news about COVID-19 vaccines. Sentiment also benefited from hopes that a “no-deal” Brexit might be avoided. The best-selling asset class, equity funds, gathered £1.1 billion of inflows during the month. Property funds suffered the most outflows, recording £550 million of net redemptions.
- In November, the Swiss fund market registered its first negative month of 2020, posting net outflows of €750 million. Money market funds were hardest hit, registering net outflows of €1.3 billion, whereas bond funds gathered the largest inflows at €623.7 million. The Swiss fund market had attracted net inflows of €18.6 billion by the end of November. The AUM of the market stood at €567.1 billion at month-end, 5% more than its 2019 year-end value.
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