As ESG-aligned funds continue to dominate fund flows across Europe, asset managers are noting increasing investor demand for thematic vehicles capitalising on the current sustainable revolution within society.
According to the Investment Association (IA), responsible funds now make up 5.1% of the overall share of funds under management, versus just 2.7% at the end of Q1 2020. Aside from strong investor flows into general ESG strategies, Christophe Girondel, head of institutional and wholesale distribution at Nordea Asset Management, told International Adviser that thematic-ESG vehicles are increasingly resonating with investors.
“We have witnessed incredibly strong demand for our climate-related solutions over recent years, as the fight against climate change has intensified within society,” he said. “More recently, investors have begun to note the appeal of strategies seeking to address the social – or ’S’ – element of ESG.”
What’s next?
To illustrate this growth, according to BlackRock, there are currently 42 climate-based ETFs in Europe – with AUM of just under £8bn. A year ago, there were only half the number of climate ETF strategies and AUM totalled just £1.9bn ($2.6bn, €2.2bn).
Kimberly LaPointe, head of PGIM Investments International, said it has also witnessed a surge in demand for funds that are thematic in nature, as investors look for investment stories they can relate to.
“This is understandable, as the pandemic has disrupted the way we live, communicate, and do business,” LaPointe said.
Aside from climate change, LaPointe said investors are seeking exposure to areas at the forefront of what PGIM calls the “Next Economy”, namely themes such as digital payments, e-commerce platforms and cloud computing.
“Behaviours have been massively altered as a result of the pandemic and we believe flows into funds tied to new world themes will further accelerate in the years ahead,” she said.
Traditional sectors not done yet
John Yule, head of UK and Ireland at T Rowe Price, said after years of muted activity, the group has witnessed heightened investor interest for its dedicated value strategies – global, US and emerging markets – over the course of 2021.
“Despite continued pessimism, we believe there are tailwinds able to sustain the recent value rally over the longer term,” he said.
The value-style of investing can also be a beneficiary of the sustainable revolution theme, Yule believes. He said the world’s goal of carbon neutrality by 2050, or 2060 in the case of China, can boost many traditional or old economy industries during the long transition period.
“To meet green energy and carbon emission targets, the world will need to spend heavily on traditional industrial sectors during the transition years,” Yule said. “China alone is projected to require spending of $10-15trn to transition to a more energy efficient economy.”
While interest in T Rowe’s value strategies has increased, Yule added its regional equity funds have also witnessed consistent investor inflows this year.
“Japan remains a popular destination,” he said. “The Japanese equity market is closely aligned to the global economy, so investors are recognising Japan’s corporates will benefit more than most from a post-covid recovery.”
Flexible and low duration
Aside from the heightened appeal of thematic funds, Girondel said Nordea is also seeing elevated investor demand for its Alpha range of liquid alternative solutions.
“Following the strong bounce for global stock markets over the past 18 months, concerns surrounding valuations are clearly on the rise, which has driven many investors to seek out solutions with performance drivers not tied to equity beta,” he said.
So, what about bonds? Girondel said the low yield environment continues to create difficulties for fixed income investors, especially with elevated inflation levels in many parts of the world.
“We are noting renewed appetite for flexible and low-duration fixed income strategies, which have the tools required to navigate through such a challenging environment,” he said.
