What Awaits Thematic Investing in Europe in 2021?

January 5, 2021 — London

Certain themes and sectors will benefit from defined long-term structural changes

The surge in demand for thematic funds in Europe last year is set to continue, according to the latest issue of The Cerulli Edge―Global Edition.

Net flows into sector-themed equity products during the first 10 months of 2020 amounted to €89 billion (US$108 billion), more than triple the net sales for 2019. Assets under management amounted to €512.4 billion at the close of October 2020.

According to research from Cerulli Associates, demand for funds with themes focused on water, biotechnology, and technology is likely to increase over the next 12 to 24 months.

“The consensus of managers operating in Europe is that broad themes relating to technology and sustainability will prevail in the aftermath of COVID-19 and longer term,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

Some 84% of the exchange-traded fund (ETF) issuers in Europe that responded to a Cerulli survey expect significant or moderate demand for thematic ETFs in the next 12 to 24 months. Over the first 10 months of 2020, technology-related themes were the most popular, attracting a combined €28 billion or 32% of net inflows, followed by healthcare at 15%, and renewable energy/climate change at 12%.

Cerulli’s research shows that ETF issuers in Europe expect growth in demand over the next 12 to 24 months to be strongest for sustainability-related themes such as water and biotechnology, closely followed by technology. Almost all the managers that responded to Cerulli’s survey (92%) expect demand for water-themed ETFs to increase over the next two years. Combined active and passive assets in the water-themed sector have achieved a compound annual growth rate (CAGR) of 23% over the past five years.

Cerulli believes that asset managers can source new opportunities from working closely with technical experts in fields such as biotechnology and healthcare to ensure that specialist funds are able to capitalize on areas of potential growth.

“Technology themes, which include artificial intelligence, cybersecurity, and 5G networks, are expected to continue to attract high demand, in part due to the success of mass remote working, which is likely to continue to an extent post-pandemic. Some 84% of our survey respondents believe that technology-themed ETFs will experience an increase in demand in the next 12 to 18 months,” said Zumbo.

“Investors are becoming more comfortable with using thematic ETFs for diversification and to express their investment objectives—a reflection of how the product set is evolving,” he continues. In addition, according to several asset managers interviewed by Cerulli in Europe, thematic funds are generally easier to sell to end clients because the attached compelling narratives make the products easier to understand.

Other Findings:

  • In Asia, prolonged low-interest-rate conditions are compelling regional insurance companies to search for yield. Cerulli research shows that the best markets for external mandate opportunities over the next three years are China, followed by Korea and Hong Kong. In terms of asset classes, alternative mandates offer the largest increase in general account opportunities over the next three years, followed by fixed income.
  • In the U.S., Cerulli expects that the number of financial advisors adopting asset allocation models will continue to rise in 2021. Advisors are looking to outsource portfolio management in order to spend more time on business development and providing clients with more personalized wealth management services.

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Note to editors

These findings and more are from The Cerulli Edge―Global Edition, January 2021 Issue.

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