Passively managed funds have weathered the market volatility of 2020, underscoring the need for active funds to deliver better and more consistent performance in order to slow the erosion of their market share.
Amid the Covid-19 pandemic, global equity markets fell more than 30% in March, causing unprecedented volatility for index funds and passive investors. Both strategies saw net outflows for the month. But while active companies lost 3% of its early year managed assets (AUM), their passively managed counterparts only lost 1%, according to a global data provider.
“While equity market declines tested passive strategies in early 2020, the rapid rebound in global equity markets meant there was little risk of migration to active vehicles,” said Fabrizio Zumbo, associate director, European Asset and Wealth Management Research, Cerulli Associates. a global research and consulting company. He assumes that passive funds will continue to gain market share in 2021.
Passive funds have seen steadily increasing net inflows in recent years. In response, rather than contrasting active strategies with passive strategies, the investment industry has shifted to supporting an approach to portfolio construction that combines the two.
Nonetheless, passive products continue to gain ground, backed by a track record of outperforming and falling fees.
Zumbo believes that growing demand for environmental, social and governance (ESG) investments will drive demand for active and passive funds.
ESG mutual funds, index trackers, and exchange-traded funds (ETFs) have all grown rapidly over the past five years, Cerulli says. From 2015 to 2019, actively managed mutual fund assets grew at an average annual growth rate (CAGR) of 15%, index fund assets by 34% and ETF assets by 72%.
Institutional investors have driven the growth of responsible assets in Europe. Since 2015, the total assets of institutional responsible investments, including those held in mutual funds and ETFs, have grown by 16.8% per annum to more than 5 trillion euros ($ 6.7 trillion), according to Cerullis estimates.
In the retail investment market, Europe-based mutual funds and ETFs exceeded € 1 trillion in ESG assets in August 2020.
More than half (57%) of the ETF issuers surveyed by Cerulli in Europe named developing ESG ETF products as a top priority for their companies over the next two years. Several have launched innovative and highly specialized ESG value propositions.
ESG investments have favored active actors and asset managers’ ESG integration approaches are moving from simple exclusion (screening to avoid sectors such as alcohol, tobacco and weapons) to a more systematic approach.
This requires a high level of active management – for example, incorporating ESG factors into investment decisions and applying stewardship practices to ensure that all financially material factors are included in the risk and return assessment.
However, passives are increasingly gaining ground in this area. The assets of passive ESG equity funds grew at a CAGR of 32% from 2015 to the end of 2019, while the assets of active ESG equity funds had a CAGR of 17% over the same period.
About 73% of ETF issuers who participated in Cerulli’s survey expect significant demand for ESG ETFs in Germany and 70% expect significant demand in Sweden and France.