A booming, changing market

What are the current product design challenges for the fund industry? The first morning of the virtual ALFI European Asset Management Conference 2021 highlighted market research, and the strategy of two asset managers.
The market is booming. Global net sales in ETFs and mutual funds in 2020 were up $744bn globally, of which two-thirds was in the Asia-Pacific with most of the rest in Europe, according to figures from the analysts Broadridge.

ESG and passives to the fore

In Europe, the data backs up the hype around ESG, with sales of these funds up from about 60bn in 2018 to 210bn last year. The share of these on the “impact investing” end of the spectrum accounted for more than 20% last year, double the figure of 2017. Passives accounted for 22% of AuM, up from 16% in 2016, with ETFs representing about half in both years.

…with alternatives also on the up

A survey of asset managers conducted by Broadridge towards the end of last year found that ESG, thematic equities, Asian equities, emerging markets and alternatives are seen as the most promising growth strategies. On the way down were different types of bond funds.
Growth was broadly flat in private markets last year, according to data from Prequin. AuM in alternatives globally was $10.7trn in 2020, down from $10.8trn in 2019. However, it is expected that the near 10% annual growth which has been the norm since 2010 will return over the next five years. Alternative AuM would then reach $17.2trn in 2025.
Europe-focused private equity fund dry powder was more than double the 2017 figure in early 2021 at near $420bn. There is about $85bn dry power for infrastructure, and $100bn for private debt. All these figures are about double the 2017 figure.

Impetus towards personalised fund portfolios

“The ESG impact that companies have is becoming a third dimension alongside risk and return,” said Carolina Minio-Paluello, Global Head of Product, Solutions and Quant at Schroders, commenting on the impact of these trends on the industry in a later panel. Agreeing with this outlook, Daniel Rotherford, Global Head of Product Management & Governance HSBC Global Asset Management sees the answer being: “building enduring relationships with clients though greater client centricity, not just from an investment perspective, but also from a reporting and an operational perspective.”
“Personalisation is about portfolios that respect the values of the client, and you can implement this with funds,” said Ms Minio-Paluello. She also had a challenge for the fund servicing industry: “we will need infrastructure that allows for this, and transforming legacy business is going to be difficult.”

SFDR catalysing global ESG investing

Firms with global umbrella funds in Luxembourg face a tricky task of meeting SFDR requirements for European clients, while respecting the wishes of Latin American and Asian investors who might be less further down the ESG journey. “SFDR has been the catalyst globally, and there is going to be a seeping out of that regulation into other jurisdictions,” Mr Rotherford noted.

Income strategies combining alternatives and passives

“Private equity or venture capital, infrastructure, debt: these types of products are seeing huge inflows and will continue to do so for some time due to low interest rates,” said Mr Rotherford. Post-Covid substantial repair-work will be needed in sectors such as leisure, hospitality, and travel and he sees opportunities here for the alternative sector to help, while generating high yields. 
Meanwhile easy-to-access digital distribution will lean heavily on passive products, Ms Minio-Paluello added. “Income type of strategies would bring the two together, rather than looking at liquid and private assets separately,” she said, adding “there is still an important role for active managers.”