European Investors are Embracing ESG While Looking to Cut Costs Where Possible

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European Investors are Embracing ESG While Looking to Cut Costs Where Possible

Investors and distributors are looking for ESG products, diversified passive options, and long-term partnerships

April 2020, London—Cerulli Associates’ latest report, European Distribution Dynamics 2020: Cross-Roads and Cross-Borders, shows that asset managers in Europe expect demand for environmental, social, and governance (ESG) and socially responsible investment (SRI) products to increase over the next 12 to 24 months.

Although asset managers have been unveiling ever more active and passive ESG value propositions over the past three years, the ESG fund market is still in its early stages. At the end of 2019, the assets of ESG mutual funds and exchange-traded funds (ETFs) domiciled in Europe accounted for only around 6% of total European assets.

However, responsible investing is increasingly important for European private banks: 76% of the banks Cerulli surveyed expect to see an increase in demand for ESG/SRI funds. More specifically, 40% of them anticipate significant demand for such funds from their clients over the next 12 to 24 months and 35% expect moderate demand.

“In recent years, managers have focused on product innovation with the aim of broadening their ESG value propositions,” says Fabrizio Zumbo, associate director in Cerulli’s European asset and wealth management research team and lead author of the report. “Equity still accounts for the largest proportion of the assets of ESG mutual funds domiciled in Europe, but several managers have added new fixed-income propositions in a bid to diversify the revenue drivers of their ESG platforms and attract new flows.”

ESG thematic funds are increasingly popular with European investors, who are increasingly open to the narratives behind such products. In particular, managers are experiencing increased demand for thematic ESG value propositions from the wholesale channel, particularly private banks. This is not just in the active space, but also in ETFs. Firms are seeking to build compelling narratives that could attract new flows to their ESG platforms.

“Managers with diversified offerings in the active and passive domains, including niche and specialized exposures, will have a competitive advantage when it comes to attracting new flows,” adds Zumbo.

European investors now use ETFs as buy-and-hold funds, tactical asset allocation vehicles, and trading instruments and as transparent, lower-cost building blocks for portfolio construction. Cerulli’s research shows that asset managers expect passive, smart beta, and active ETFs to continue to grow in popularity across Europe. Managers and ETF issuers should consider creating specialized and diversified offerings to differentiate themselves in an increasingly busy market.

Cost-effectiveness is becoming paramount for European investors and ETFs are set to play a more important role in private banks’ client portfolios as they seek diversification and new drivers of performance. Building long-term partnerships is taking a central role in asset managers’ strategic planning because distributors such as private banks are focusing on working with preferred partners. The process of fund selection by distributors and intermediaries is also becoming more stringent and selective, so managers throughout Europe are focusing on enhancing their marketing efforts, particularly in the brand awareness and digitalization domains.

 

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NOTES TO EDITORS:

The Cerulli Report—European Distribution Dynamics 2020: Cross-Roads and Cross-Borders features an in-depth analysis of the European fund management industry and outlines the key trends in the region’s main fund markets. Cerulli’s team of international analysts has examined the state of mutual fund and ETF distribution across the main European asset management markets and assessed the implications for asset managers.

 

INTERVIEWS AND SURVEYS:

Cerulli’s analysis focused on proprietary research, including a series of in-depth surveys and 90 interviews with fund managers and distributors in the U.K., Germany, Italy, Switzerland, France, Spain, Sweden, Luxembourg, and Ireland. A total of 140 managers, with more than €7 trillion (US$7.9 trillion) of European fund assets under management (AUM) between them, completed a survey examining their distribution channels in the key European markets, their expected demand for ESG and ETFs, product development trends, and the opportunities and challenges they face in selected European countries.

In addition, 55 private banks operating in Europe, with total AUM of €3 trillion, completed a survey examining their portfolio construction practices; their use of ETFs and their expectations of passive ETF, smart beta ETF, and actively managed ETF growth in Europe; their use of ESG products; and the main challenges and opportunities they face in key European markets.

A total of 100 IFAs operating in Europe, with total AUM of €134 billion, completed a survey regarding their portfolio construction practices, their fund and manager selection, their use of different investment products, current and expected demand for specific products and services, and how their clients are approaching ESG and passive investing.

 

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