Cerulli Associates predicts passive funds are set to continue gaining market share

Fabrizio Zumbo, Cerulli Associates

Passively managed funds weathered the market volatility of 2020, highlighting the need for active funds to deliver better and more consistent performances in order to slow the erosion of market share, according to Cerulli Associates.

The firm writes that as it became clear that Covid-19 was spreading around the world, global equity markets fell by more than 30 per cent in March 2020, sparking unprecedented volatility for index-tracking funds and passive investors. Both strategies posted net outflows for the month, the firm says, however, whereas actives lost 3 per cent of starting-year assets under management (AUM), their passively managed counterparts lost only 1 per cent, according to a global data provider.

“Although stock market declines early in 2020 tested passive strategies, the swift recovery in global equity markets meant there was little threat of an exodus to active vehicles. Cerulli expects passive funds to continue gaining market share in 2021,” says Fabrizio Zumbo, associate director.

Cerulli notes that passive funds have been steadily growing net inflows in recent years. In response, instead of pitting active strategies against passive strategies in portfolio construction, the investment industry has shifted to more widely endorsing an approach that combines the two. Nevertheless, passive products continue to gain ground, helped by a track record of outperformance and falling fees.

Zumbo expects the growing demand for ESG investments to drive demand for both active and passive funds. ESG mutual fund, index tracker, and ETF assets have all grown rapidly over the past five years. From 2015 to 2019, actively managed mutual fund assets grew at a compound annual growth rate (CAGR) of 15 per cent, index fund assets grew at a CAGR of 34 per cent, and ETF assets grew at a CAGR of 72 per cent. 

Institutional investors have driven the growth of responsible investment assets in Europe. Since 2015, total institutional responsible investment assets, including those held in mutual funds and ETFs, have grown by 16.8 per cent per year to more than EUR5 trillion (USD6.7 trillion), according to Cerulli’s estimates. In the retail investment market, Europe-domiciled mutual funds and ETFs passed EUR1 trillion in ESG assets in August 2020.

More than half (57 per cent) of the ETF issuers in Europe that Cerulli surveyed identified the development of ESG ETF products as a top priority for their firms over the next two years. Several have launched innovative and highly specialised ESG value propositions.

ESG investments have favoured active players and asset managers’ ESG integration approaches are evolving from simple exclusion (screening to avoid sectors such as alcohol, tobacco, and weapons) to a more systematic approach. This presupposes a high level of active management—for example, incorporating ESG factors into investment decision-making and employing stewardship practices to ensure that all financially material factors are included when assessing risk and returns. However, passives are increasingly gaining ground in this space. Passive ESG equity fund assets grew at a CAGR of 32 per cent from 2015 to the end of 2019; active ESG equity fund assets grew at a CAGR of 17 per cent over the same period. Some 73 per cent of the ETF issuers that responded to Cerulli’s survey expect significant demand for ESG ETFs in Germany and 70 per cent expect significant demand in Sweden and France.

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