Cerulli Associates’ latest report, European Distribution Dynamics 2022: Uncovering Growth Opportunities, shows that the growth of thematic funds is a key feature of the evolution of the asset management industry in Europe.

The thematic fund space has been a hub for innovation in recent years as appetite for thematic mutual funds and exchange-traded funds (ETFs) is growing rapidly across Europe. Cerulli’s research shows that passive thematic products are set to exhibit the most growth over the next two years. Just 9.2% of the asset managers Cerulli surveyed expect active thematic funds to grow at a fast rate (by more than 10%) over that period, but 36.6% believe thematic index funds will grow quickly and 27.5% believe that thematic ETFs will grow at such a rate.

“Managers that can increase their specialization in thematic investing, across passive and active strategies, will be able to differentiate their offerings,” says Fabrizio Zumbo, director of European retail and wholesale research at Cerulli and the lead author of the report. “This will help them attract new business, given the expected demand for such products over the next two years.”

One popular theme is sustainability: retail investors across Europe continue to increase their focus on responsible investment. Despite the overall growth and increasing specialization of environmental, social, and governance (ESG) value propositions in recent years, at the end of 2021, the majority of European ESG assets were held in equity mutual fund products. Managers may find new avenues for growth by improving their value propositions in the alternative and sustainable thematic segments.

However, Cerulli cautions that the robust growth in demand for ESG in recent years has led to increasing concerns about the methodologies asset managers use to classify their offerings under the Sustainable Finance Disclosure Regulation (SFDR) framework, which came into effect in March 2021. The majority of the asset managers Cerulli surveyed across Europe identified the limited availability of ESG data as a significant challenge and said that improving the measurement and reporting of ESG risk will be a high priority for them over the next two years. Several regulators in Europe have noted that managers’ applications to categorize funds under the SFDR have room for improvement. Managers should ensure that their ESG products meet the needs of consumers and that they comply with both local and EU-wide rules.

“Managers operating across Europe are already struggling with the variations between markets in terms of rules and preferences, including local ESG labels,” adds Zumbo. “Managers must ensure that ESG products are designed with the needs of consumers and society in mind. They must combine compliance with local rules with efforts to meet investors’ preferences; for example, by enhancing their reporting on impact or aligning products with the UN’s Sustainable Development Goals.” The growth in demand for ESG products is not expected to slow in the near future and specialized and innovative value propositions that include passive, active, thematic, and alternative strategies could bring fresh flows from European investors.