iShares predicts European ETF assets to double in the next five years

Stephen Cohen, iShares

iShares’ Global Head, Salim Ramji has commented that disruptive European ETFs could be set to see assets double in the next five years to USD2 trillion, as more investors look to build flexibility into their portfolios, particularly in fixed income and sustainability exposures.

Ramji says: “ETFs have been disrupting asset management for over two decades but we’re still in the early stages of the transformation. The next phase of acceleration is primarily driven by the recalibration of what it means to be an active investor. The performance of ETFs through the latest market stress test illuminated the trust that investors place in ETFs to manage risk, seek price discovery and hedge portfolios and risk – and the trends we have historically seen in the US market, are now playing out in Europe as we reach critical mass.”

Stephen Cohen (pictured), Head of EMEA iShares, says: “Investors acknowledge now that more profound changes are needed at portfolio level and that ETFs have the breadth of exposures and size to be ideal instruments to implement a lot of these changes. Over the next five years, we expect about 40 per cent of new assets to be in fixed income, and about a quarter in ESG exposures, as the myths give way to undeniable facts about their utility.”

Their comments came at a briefing from BlackRock last week, where a team of senior leaders and portfolio managers from the firm shared insights into how clients have approached a tumultuous year, and how they are tackling an increasingly uncertain future. 

Speaking at the event, Rachel Lord, Head of EMEA, said: “The current environment is an incredible opportunity to drive change, and to learn. Sustainability is front and centre of the minds of most leaders I speak to – both in terms of ensuring that they run more sustainable business models, and how to source better ESG data as portfolios evolve far more rapidly than pre-pandemic to achieve better long-term returns.” 

Concerning the drivers of growth for BlackRock in EMEA, Lord said: “Our profitability is inextricably tied to our ability to deliver what clients need today for their whole portfolio, to anticipate what they might need tomorrow, and be the best at both. Asset managers that don’t focus on what technology is doing to the whole value chain will lag behind those that do.”

Faced with a dense calendar of geopolitical events in Q4, BlackRock urged investors to focus on practicing how they would react to different scenarios instead of trying to predict the future. Pierre Sarrau, CIO of Multi-Asset Strategies and Solutions, said: “Pressure testing the robustness of your portfolio and holding assets that allow for flexibility has never been more important.  We are particularly focused on the fixed income component of the portfolio given interest levels - the impact of inflation, which investors are waking up to as a real risk to portfolio performance - and the turbo charging of sustainability in portfolios.”

Simona Paravani-Mellinghoff, Global CIO of Solutions in the Multi-Asset Strategies and Solutions team, noted: “Across our multi-asset portfolios, we favour inflation-linked bonds and have been selectively allocating to credit. We are finding that holding cash may be an expensive luxury for many investors, especially when the cash allocation is not dictated by liquidity needs, and there might a case to diversify it into short-dated, high-quality credit. Also, an increasing amount of sustainability data is becoming available, thus enabling research employing artificial intelligence to help identify risks and opportunities.”

BlackRock believes that discipline and patience will be critical for private markets in 2021. 

“Private markets, or alternatives investing, are a bigger part of portfolios than they have ever been, and the pandemic has accelerated existing structural shifts,” the firm writes.

Commenting on the pockets of opportunities going forward, Jim Barry, CIO of BlackRock Alternative Investors, said: “There will be greater dispersion between winners and losers this time round, which will require investors to be disciplined and patient in selecting exposures if they want to tap into the fast rivers of structural growth. With this however, comes risk and while prices for assets in real estate may look impressive compared to figures of six-12 months ago, investors should question if they are the right prices for the varying risks they are now facing.”

Speaking about the interplay between sustainability and alternatives investing, Teresa O’Flynn, Global Head of Sustainable Investing for Alternatives said: “The historic focus on the trade-off between “growth versus sustainability” in alternatives is giving way to a mindset of “growing sustainably”. Protecting the long-term value of our assets by assessing exposure to ESG risk and opportunities such as their contribution to emissions targets goes to the core of what we’re doing. Rather than dampening the trend for ESG, COVID-19 has only accelerated investors’ commitment to it.”  

Tarek Chouman, Head of Business Development for Aladdin, added: “Given the uncertainty in the markets over the last few months, having access to technology that analyses data and assesses risk across both public and private markets has never been more critical.”

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