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UK wealth managers and private banks are expanding into passive: Cerulli Associates

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Latest research from Cerulli Associates finds that responsible investment allocations among the UK’s wealth management channel are evolving, expanding beyond active environmental, social, and governance (ESG) equity products to include fixed-income and passive strategies.

The research also finds that some of the country’s wealth managers and private banks are now embracing passive funds more broadly and offering a passive model portfolio service. 

“Almost 44 per cent of UK wealth managers and private banks expect demand for index funds and ETFs to increase over the next 12 to 24 months,” says Fabrizio Zumbo, director, European asset and wealth management research. Furthermore, 80 per cent of asset managers in the UK also expect ETFs and 60 per cent expect index mutual funds to experience moderate or fast growth of their assets over the next one to two years.  

Wealth managers’ and private banks’ demand for passive ESG strategies is currently higher than their demand for active ESG strategies: 29 per cent in the UK see high demand for index ESG funds and 10 per cent see high demand for active ESG funds.  

It is still the case that the bulk of ESG funds in the UK are equity funds. Yet having a higher number of options in fixed-income and multi-asset strategies has made life easier for local fund selectors. Cerulli writes that the availability of ESG ETFs generally has improved significantly in the UK: just 27 were listed on the London Stock Exchange (LSE) at the end of 2018, compared to 194 as of March 2023.1 In 2022, LSE-listed ESG ETFs saw net inflows of £23.4 billion (US$29.1 billion).  

According to the research, wealth managers and private banks foresee a growing role for ESG fixed-income ETFs focused on developed markets. Only 12 per cent of the 90 ESG ETFs newly listed on the LSE in 2021 and 2022 were bond ETFs; these new ESG bond ETFs saw net inflows totalling GBP1.4 billion, showing that there is sizable demand for such products. 

“Wealth managers and private banks express considerable appetite across most asset classes in the ESG index fund space. ESG fixed-income ETFs could be a real growth segment—an area that could be better served by asset managers operating in the UK,” says Zumbo. Concerns about fees might be a factor, especially if intermediaries have been disappointed by the performance of some active ESG funds in the past 18 months. Growing appetite for ESG fixed-income funds is also likely linked to growing appetite for fixed-income funds more broadly. However, 27 per cent anticipate demand for active ESG funds to increase, suggesting that wealth managers and private banks see value in a more active approach to responsible investment. 

“Whether considering product launches or how to promote existing products in this area, managers should follow developments on the UK’s proposed sustainable fund labels. Clear positioning of a fund’s sustainability credentials will help wealth managers decide how it fits within dedicated sustainable investment services or their ‘mainstream’ offerings to clients,” says Zumbo. 

Other findings from Cerulli at this time are that Dutch pension funds have until 2028 to switch their defined benefit pension schemes into defined contribution contracts. Cerulli writes that as a result of the transition, industry-wide pension funds may increase allocations to private markets as pension guarantees disappear. Asset managers seeking to grow their pension business should support Dutch pension schemes during the transition phase by helping them with investment solutions and the operational model, as well as with communication with their members, says Cerulli. 

The firm also found that direct-to-consumer (D2C) platforms saw assets under administration fall in 2022. Nevertheless, Cerulli believes that the underlying, long-term picture for D2C platforms across Europe remains bright. It says that a combination of factors points to D2C platforms becoming even more important for asset managers; for example, online platforms are playing an increasing role in the growing demand for ETFs. In addition, more specialist services are emerging.

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