When it Comes To Thematic Investing, Passive Funds Look Set To Outshine Actives

Battery technology, climate change, and biodiversity are expected to be the most in-demand themes

June 5, 2023, LONDON—The European thematic fund market presents interesting opportunities for asset managers and exchange-traded fund (ETF) issuers, particularly in the passive sphere, according to the latest Cerulli Edge—Global Edition.

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.”

Growth Of Thematic Products

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 €409.4 billion (US$438.4 billion) at the end of 2021, up from €91.3 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% year on year, falling from €409.4 billion in 2021 to €312.3 billion.

Market volatility has affected growth expectations among asset managers, but distributors’ and financial advisors’ appetite for thematic funds is expected to continue. According to the research, just 8% of the asset managers expect fast growth (greater than 10%) of active thematic mutual fund assets. Managers are more positive when it comes to thematic index funds: 39% expect fast growth in assets over the next 12 to 24 months, and 21% expect thematic ETFs to experience such growth. Only 5% 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% 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% expect demand from independent financial advisors 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% anticipate fast growth of thematic index fund assets and 28% anticipate fast growth of thematic ETF assets. In Switzerland, two-thirds of respondents expect fast or moderate asset growth (6% to 10%) for thematic index funds; 24% expect fast asset growth for thematic ETFs. Respondents in Sweden believe passive vehicles are primed for growth in the thematic space: 55% expect fast growth in index fund assets and 45% 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.

Other Findings:

• In the US, almost 80% of the asset managers Cerulli surveyed have increased their budgets for distribution technology and 63% of distribution executives consider the expansion of digital marketing capabilities a top priority. Asset managers are facing competitive pressure to strengthen advisor interactions by providing more relevant information—in real time. Firms can use digital resources to cast a wider prospecting net and to increase cross-collaboration between marketing and sales to enhance lead generation. However, managers need to be cautious of advancing with new technology before the people, processes, and systems are in place. Effective implementation and inspiring sales teams to take advantage of new capabilities may require a cultural transformation.
• In Southeast Asia, banks’ total marketshare in the mutual fund industry declined from 65.2% in 2020 to 59.2% in 2022; over the same period, the marketshare of other players, such as insurers and tied agents, increased. Cerulli’s research shows that non-affiliated banks will be a key priority for asset managers over the next three years. Given the growing number of customers purchasing and transacting via mobile devices, Cerulli believes that mobile apps and digital channels will become a game-changer in mutual fund sales. Accelerated digitalization of product distribution will enable fund houses to reach investors more easily and at a lower cost.

[1] Source: Morningstar

About Cerulli Associates

For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.

Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.