January 11, 2021

Monday Morning Memo: Three Trends from 2020 That Might Shape the Future of the European Fund Industry

by Detlef Glow.

Despite the market turbulence caused by the outbreak of the novel coronavirus and the following COVID-19 pandemic induced lockdowns of economies around the globe, the year 2020 seems to be a successful year for the European fund industry. Even as the final numbers are not accounted yet, it looks like 2020 will be the year with the second highest overall inflows into mutual funds and exchange-traded funds (ETFs) in Europe (€449.69 bn as of November 30, 2020). That said, not all fund promoters in Europe might agree with this view, as the year showed strong fund flow trends which didn’t favour all type of funds.

While the trend towards passive products continued, some actively managed funds struggled to gather new money. Over the course of the first 11 months of 2020, roughly one-third (32.42% or €145.8 bn) of the estimated net inflows was invested in ETFs and index funds. If this trend continues it is only a question of time when the flows towards passive products will overtake the flows into actively managed products.

The second trend which has developed over the last few years was the trend towards sustainable investments. After governments and regulators increased their focus on environmental, social and governance (ESG) topics, it was not surprising that we also witness an increasing demand from investors for respective investment products. That said, it was surprising that 53.59% (€241.0bn) of the estimated net inflows for the first 11 months were invested into ESG (themed) mutual funds and ETFs. Opposite to the general flow trend, the majority of these flows (€182.2 bn) were invested in actively managed products. This means that European investors do believe in active management when it comes to the implementation of sustainable investment strategies with all the respective operational tasks such as participating in annual shareholder meetings and/or the execution of voting rights or other engagements with corporations.

Another trend that can have a significant impact on the future of some asset managers is the massive outflows from alternative UCITS products (-€78.12 bn) during a year in which alternative investment strategies could have proven their strength, especially during the market turmoil in March. But as the trend shows, investors seem to be disappointed from the results of alternative UCITS products, as 2020 may mark the third consecutive year with outflows from these kinds of products.

These three trends have the potential to become the main drivers for product development and fund flows in Europe for 2021, as it is to be expected that investor demand for passive solutions and ESG strategies will continue in 2021 and the years beyond. This means that fund promoters in Europe have to modify their product ranges accordingly to capitalize on these trends. I would go even one step further and say that asset managers who fail to adapt to these two mega-trends may face massive outflows which may have the potential to change the European fund industry landscape. The same is true for alternative UCITS products, as the outflows from these products may lead to the closure of a high number of funds with the respective impact for the concerned fund promoters in the future.

 

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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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