Investors' preference to access passive strategies alongside active ones is prompting traditional active managers to develop their exchange-traded funds business in Europe.
Institutional investors are increasingly seeking low-cost strategies, driven by a low-rate environment and a heightened focus on fees. Given the growth of multiasset strategies in Europe that contain some passive elements in the last few years, money managers are looking to capitalize on the interest in passive.
"Large investors are requesting to have a full offering — index and active management — so they can access through one firm passive up to high-conviction expertise," said Isabelle Bourcier, head of quantitative and index management at BNP Paribas Asset Management in Paris. Last year, Ms. Bourcier moved to boost BNP Paribas AM's passive and ETF sales team with the addition of Katharina Anna Rost, who is sales manager for ETF and index solutions for Germany.
Sources said the passive landscape in Europe also is expanding, with quasi-active passive funds such as ETFs that enhance an index, for example, by screening for stocks with certain features. That's enabling new entrants to gain a foothold in this category.
In 2019, exchange-traded product assets in Europe increased 34.3% to $1.03 trillion from $767.7 billion, according to figures by ETFGI LLP, an independent research and consulting firm. Active ETFs made up 2% of those assets.
"Traditional active asset managers may struggle to compete profitably in the ETF market for core index products and have therefore been focusing on areas such as specialized ETFs and smart beta products," said Marina Cremonese, vice president, senior analyst at Moody's Investors Service in London.
The European market, with some 6% of all assets in ETFs compared with 24% in the U.S., according to Deutsche Bank Research, is developing more slowly than it did in the U.S. because of Europe's fragmented markets. With the passive share of total assets below 10% in most European countries, managers can still find an upside in Europe, "due to a much lower level of penetration of passive overall than forecasted five years ago," said Christian Zahn, Frankfurt-based partner and European asset management practice leader at McKinsey and Co.
Mr. Zahn thinks the passive growth on the institutional side has been below bullish expectations, excluding the fourth quarter dip in 2018, because some institutional investors are still satisfied with active products' performance.