How has the European asset management industry fared generally during the pandemic?
Not withstanding the severe capital market stress across all asset classes at the start of the pandemic, asset managers and their products navigated the turmoil robustly, and the initial drawdowns were soon reversed. This again proved that the advice for the majority of investors is not about timing the market, but time in the market. The unprecedented liquidity measures of central banks alongside the direct support for business and employees, protected economies from the worst effects of the repeated lockdowns. Asset managers were well positioned to support investors as they found themselves able to commit new funds to their portfolios. We have seen significant net inflows into many investment vehicles, in particular mutual funds, over the period. This has resulted in asset managers reporting improved results, in many cases surpassing pre-pandemic levels.
The other significant side effect of the pandemic has been the transformation of industry working practices. Up until the Covid-19 pandemic, digital adoption had mostly been evolutionary – slow and steady – but the shift to remote working necessitated a revolution in working practices as offline processes became obsolete overnight. Asset managers are keenly aware they need to keep progressing these digital opportunities, or risk falling behind. In summary, European asset managers have responded well to the challenge and revamped their technological and data capabilities.
What are some of the challenges they have faced and what are the key factors driving resilience?
Every market in Europe is of course different, but there are common themes running throughout the region. Competition remains fierce, and regulators have strengthened competitive dynamics to bring the price of investment down in many markets. Passive investing strategies continue to gain market share as a proportion of total AuM, with investors increasingly discerning with their allocation to active management. With growth in private markets, the industry is looking for products that can provide access for retail investors; but the requirement for daily liquidity prevents many mainstream products from being utilised.
The explosion in sustainable investing provides a huge opportunity for European asset managers. They can take the lead in driving the allocation of private and public capital to meet the ESG objectives of their investors and society at large.
What kind of regulatory changes have they been contending with?
Throughout the pandemic much of the regulatory calendar was postponed as there was an acceptance that many asset managers required some leeway to ensure their operations could continue as the world shifted to remote working.
Now that a normality of sorts has returned there are a number of regulatory changes that will impact the industry in the coming year, with a lot of them centred on ESG. At the heart of the EU’s ESG disclosure regime are two pieces of legislation; the Taxonomy Regulation, and the Sustainable Finance Disclosure Regulation (SFDR). The former is a classification system that determines whether an economic activity is regarded as sustainable and consistent with any of six environmental objectives, while the latter sets out the disclosure requirements for investment products and issuers. Additionally, within the EU, there are the amendments to MiFID II and the Insurance Distribution Directive (IDD) to consider that make it necessary for advisers and distributors to consider clients’ ESG preferences as part of their client suitability assessments, coming into effect on 2 August 2022.
Beyond ESG, a key focus for European asset managers will be the much-delayed transition from UCITS KIIDs to PRIIPs KIDs. UCITS were originally expected to migrate to publishing PRIIPs KIDs at the end of 2019, which was put back to the end of 2021, then June 2022 and now the end of 2022. Although, at the time of writing, the official plan is currently for revisions to the PRIIPs regulatory technical standards (the detailed rules that dictate exactly what is disclosed on a KID) to take effect on 1 July 2022, six months ahead of UCITS being brought into the fold. All the mood music indicates that this will also be pushed back to the end of the year so the dates coincide once more, which is a far more sensible and tidier arrangement.