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Passive outshines active in thematic investing: Cerulli Associates


The European thematic fund market presents interesting opportunities for asset managers and ETF issuers, particularly in the passive sphere, according to Cerulli Associates.

The firm writes that despite a below-par 2022 and continued market volatility, fresh opportunities exist for product providers that focus on building strong value propositions based on robust structural trends, themes, and detailed research. Cerulli’s analysis of the assets under management (AUM) and net new flows of European thematic funds suggests that a modest recovery took place in the first quarter of 2023, following a sharp decline last year, and expectations for growth for such products remains positive for the next 12 to 24 months.

“Thematic fund providers should build strong partnerships with sector experts to ensure product longevity,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli. “Managers may find new opportunities by enhancing their distribution partnerships with large local players across Europe to improve their reach.” 

Thematic products have been one of the fastest-growing segments of the asset management industry in Europe over the past five years. The assets of thematic mutual funds and ETFs reached EUR409.4 billion (USD438.4 billion) at the end of 2021, up from EUR91.3 billion in 2018.1 However, in 2022, the picture was markedly different from previous years: by the end of last year, the AUM of active and passive thematic funds domiciled in Europe had decreased 23.7 per cent year on year, falling from EUR409.4 billion in 2021 to EUR312.3 billion. 

Market volatility has affected growth expectations among asset managers, but distributors’ and financial advisers’ appetite for thematic funds is expected to continue. According to the research, just 8 per cent of the asset managers expect fast growth (greater than 10 per cent) of active thematic mutual fund assets. Managers are more positive when it comes to thematic index funds: 39 per cent expect fast growth in assets over the next 12 to 24 months, and 21 per cent expect thematic ETFs to experience such growth. Only 5 per cent believe there will be no asset growth across active and passive thematic funds.  

Battery technology, climate change, and biodiversity are expected to be the most in-demand themes over the next 12 to 24 months. Nearly 50 per cent of the managers anticipate growing demand for thematic funds from independent wealth managers and financial advisors. Fifty-one percent of respondents expect demand for thematic funds from independent wealth managers to increase and 50 per cent expect demand from independent financial advisers to increase. 

However, some differences in expectations exist at the country level. For example, UK asset managers expect passive thematic products’ assets to grow quickly: 44 per cent anticipate fast growth of thematic index fund assets and 28 per cent anticipate fast growth of thematic ETF assets. In Switzerland, two-thirds of respondents expect fast or moderate asset growth (6 per cent to 10 per cent) for thematic index funds; 24 per cent expect fast asset growth for thematic ETFs. Respondents in Sweden believe passive vehicles are primed for growth in the thematic space: 55 per cent expect fast growth in index fund assets and 45 per cent expect fast growth for ETFs. The outlook for thematic funds is positive in Italy, with most managers expecting fast or moderate growth for both active and passive funds. 

“Our research shows that demand for ESG products is here to stay and that sustainable thematic products, which are at the intersection of ESG and thematic investing, will continue to enjoy a healthy level of demand from retail clients in different European markets over the next 12 to 24 months,” says Zumbo. 

Zumbo notes that the lower level of assets and products in the index fund domain could prompt more product development efforts, leading to asset growth in the space.

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