A study from the Swiss National Bank takes a look at the growing importance of investment funds at the expense of banks.
Swiss banks continue to remain the gold standard in terms of managing assets, but a working paper by the Swiss National Bank (SNB) shows that funds are making substantial inroads into their business.
To be sure, this year has proven to be an extremely difficult year for wealth managers in the face of geopolitical developments, rising interest rates from central banks combating inflation, and the war in Ukraine. The challenges were evident as wealth managers reported their midyear results. Of all of those tracked by finews.com, assets under management (AuM) declined at all of the financial institutions surveyed except Valiant, as finews.com reported.
Banks Still Supreme
In 2021, banks accounted for 3.576 trillion Swiss francs of assets, up 26 percent from 2.846 trillion in 2005. At first glance, that looks impressive, but compare that to the 347 percent growth during the same period in investment funds.
While the assets of investment funds at 1.23 trillion francs are a third of those at banks, what should concern the latter is the number of entities. From 2005 to 2021, the number of banks declined by 29 percent from 337 entities domiciled in Switzerland to 239. At the same time, the number of investment funds based in the country increased 127 percent to just over 1,800, according to the SNB.
Regulatory Reforms
Since the global financial crisis triggered several regulatory reforms in the banking sector, it «contributed to a remarkable rise in nonbank financial intermediation,» the authors of the study write. It is estimated the balance sheets of nonbank financial intermediaries more than doubled from $103 trillion in 2008 to $226 trillion in 2020, with investment funds other than the money market and hedge funds exhibiting «striking growth» after the financial crisis.
«These trends indicate the growing importance of investment funds versus the declining importance of banks in the Swiss financial sector,» the authors conclude.
Looking at ESG
Investments in funds offering sustainability options are also likely to make inroads into the AuM of traditional banks.
The study also looks at issues surrounding ESG and argues that there soon may be a massive issuance of green, social and sustainable bonds, which may lead to a subsequent boom of ESG bond funds. Therefore ESG funds warrant a closer look and separate analysis for external linkages, as they have a different nature than conventional funds and are growing at a rapid pace.
According to UNCTAD estimates, the value of sustainability-themed investment products rose from $500 billion in 2015 to $3.2 trillion in 2020. As of February 2022, 5 percent of all funds’ AUM was managed by an ESG fund, according to the study.
