Passive funds will account for around a quarter of the fund industry’s total assets under management in Europe by 2025, driven by the growth in exchange traded funds (ETFs) that is in turn is being bolstered by strong demand from institutional and retail investors, says Moody’s Investors Service in a new report.
Moody’s says the research in the report, ‘Asset Management – Europe: ETF growth will propel European passive funds towards 25 per cent market share by 2025′, is an update to the markets and does not constitute a rating action.
Moody’s expects the wider passive fund sector, including tracker funds, to grow to 22 per cent of total assets under management (AUM) from 14 per cent at year end-2017 in its base case scenario, and to 27 per cent in its fast case scenario. In these scenarios, ETFs share of total fund AUM would rise to close to 11 per cent and 14 per cent respectively, from 6.2 per cent at the end of 2017.
Asset managers with passive capabilities, such as BlackRock (Aa3 stable), DWS and Lyxor, will benefit from this growth phase and continue to grow their market share.
“ETFs will become a core part of institutional investor portfolios in the next five to 10 years due to their flexibility, liquidity and competitive cost,” says Marina Cremonese, an analyst Vice President and Senior Analyst at Moody’s. “Institutional investors can use them for tactical adjustments, as a hedging and diversification tool, and increasingly as a component of a broader investment solution.”
So far, retail take-up of ETFs has been much weaker in Europe than in the US. One of the main reason for the difference in take-up is that European banks, which have dominated fund distribution, have prioritised their own relatively costly products. The growth of defined contribution pensions and new regulations are expected to drive higher adoption from retail investors in Europe.
The European Union’s MIFID II rules that were introduced in January 2018, provide better visibility over the fees charged by active funds and banned funds from paying commission to financial advisors. This will likely push retail investors towards cheaper passive funds, including ETFs, just as these become more widely available through investment platforms and robo-advisors.
