The long-term consequences of the COVID-19 pandemic for the European cross-border market are unknown, but the viral outbreak has already left its mark on the asset management industry. Cross-border managers face additional challenges, including squeezed margins, regulatory uncertainty, and Brexit. However, there are reasons for optimism, according to the latest Cerulli Edge―Europe Edition.

Many of the European cross-border asset managers Cerulli interviewed expect the demand for fixed-income products fueled by market volatility in 2020 to persist. Some are focusing on providing thematic and socially responsible investment funds for long-term investors.

“Long-term investors are seeking thematic and socially responsible investment funds and the coronavirus pandemic is feeding demand for environmental, social, and governance (ESG) investment,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

In the second quarter of 2020, the net assets of UCITS and AIFs recovered strongly, passing €17 trillion (US$20 trillion) again, according to the latest quarterly statistics published by the European Fund and Asset Management Association. Net sales of UCITS rose to €272 billion, a level not seen since 1Q 2015. All the main categories of long-term UCITS recorded net inflows during 2Q 2020 and money market funds attracted €136 billion, the largest quarterly inflows ever.

The coronavirus crisis has sharpened appetite for ESG investment. Cerulli expects this to continue and to create opportunities for growth. Broadening the spectrum of ESG mutual funds and exchange-traded funds is a strategic priority for many cross-border managers in Europe, as is product innovation.

“Several of the cross-border managers Cerulli interviewed said they will be prioritizing the launch and promotion of fixed-income and multi-asset funds that incorporate ESG factors. They see an opportunity, because the responsible investment market is still predominantly comprised of ESG equity funds that do not cater to more risk-averse investors,” says Zumbo.

In response to Brexit uncertainty, many cross-border managers have already established new management companies in Luxembourg or Ireland to minimize disruption. Brexit is, however, just one of several challenges that asset managers have faced this year. Others include the high level of redemptions, increased liquidity risk, and the pressure on firms’ risk management functions due to the volatility in regional and global markets caused by the COVID-19 pandemic.

Other findings:

• Five years after the EU unveiled its vision of a single market for capital, significant barriers remain. Progress has been slow, despite some wins, but there is encouragement for asset managers in a new Capital Markets Union (CMU) action plan that includes a review of existing regulatory reforms. The EU has put the CMU at the center of its post-coronavirus recovery strategy and the delivery of the European Green Deal. Asset managers are well placed to benefit from helping the CMU in its aim of widening the range of investments available to businesses and individuals.
• Cross-border Institutions for Occupational Retirement Provision (IORP) activity remains limited. Inhibiting factors include sponsors’ limited awareness of IORP products, the heterogeneity of sponsors’ employee benefit packages, and a lack of critical mass. Part two of the IORP directive was intended to remove barriers to the cross-border management of collective retirement schemes, but progress has been slow. Multi-employer cross-border solutions can offer a more efficient implementation route for sponsors, but asset managers should be aware of the limitations of distributing to these providers. Nevertheless, assets are expected to become increasingly concentrated among IORPs.
• More than half of the European asset managers Cerulli surveyed expect to devote increased resources to private banking and wealth management over the next two years. Some 76% of respondents said that the average length of their sales cycle is longer than it was two years ago; increased client complexity is one of the main causes of this increase in duration.