Clustering of EU member states by the level of development of institutional investor asset management

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Clustering of EU member states by the level of development of institutional investor asset management

Tokar Volodymyr

Doctor of Economic Sciences, Professor, State University of Trade and Economics

The financial landscape within the European Union is characterized by a significant disparity in the development of institutional investor asset management across its member states. Institutional investors, such as pension funds, insurance companies, and investment trusts, are vital in shaping financial markets and influencing economic stability. This study aims to fill the gap in the existing literature by examining the grouping of European Union member-states. The research focuses on examining key attributes, trends, and performance indicators of institutional investor asset management across various EU member-states. It utilizes data from 2017 to 2022, reflecting the average values of financial assets held by institutional investors as a percentage of Gross Domestic Product (GDP). This data provides a critical perspective on the investment landscape within the EU, particularly focusing on investment funds and insurance corporations. A notable observation from the data is the significant variance in the financial assets to GDP ratio among EU countries, with Denmark and France showing exceptionally high ratios, indicating a substantial role of institutional investments in their economies. In contrast, Lithuania and Greece demonstrate much lower ratios. This disparity is further analyzed through cluster analysis, grouping EU member-states into five clusters based on their asset management profiles. The clusters reveal distinct patterns in the distribution and development of asset management across the EU. Countries like Denmark and France, with highly developed financial markets, contrast sharply with those like Lithuania and Greece, which have less mature markets. The study highlights the influence of various factors such as economic structure, regulatory environment, and cultural attitudes towards savings and investment on these disparities. The study suggests that future research should focus on developing comprehensive policy recommendations, taking into consideration the distinct characteristics of each cluster to promote balanced economic growth and stability within the EU.

Keywords: asset management, cluster analysis, comparative analysis, EU member-states, financial markets, institutional investors, investment strategies.

КЛАСТЕРИЗАЦІЯ КРАЇН-ЧЛЕНІВ ЄС ЗА РІВНЕМ РОЗВИТКУ УПРАВЛІННЯ АКТИВАМИ ІНСТИТУЦІЙНИХ ІНВЕСТОРІВ

Ключові слова: управління активами, кластерний аналіз, порівняльний аналіз, країни-члени ЄС, фінансові ринки, інституційні інвестори, інвестиційні стратегії. management institutional investor

Statement of the problem

Institutional investors, such as pension funds, insurance companies, and investment trusts, play a pivotal role in the financial markets, influencing capital flows and economic stability. The development of asset management within these institutions significantly impacts the financial dynamics and overall economic health of the countries in which they operate.

However, there is a noticeable disparity in the maturity and sophistication of institutional investor asset management across the EU. This uneven landscape presents a complex challenge, as it affects investment strategies, risk management, and ultimately the economic outcomes for each member state. A key problem is the lack of a comprehensive framework to effectively cluster and compare the EU member-states based on the development level of their institutional investor asset management.

Analysis of recent research and publications

The literature on asset management of institutional investors encompasses a rich array of research examining various facets, challenges, and perspectives encountered by different types of institutional investors, such as pension funds, mutual funds, insurance companies, and investment firms.

For instance, Grybauskas and Pilinkiene emphasize the potential of Real Estate Investment Trusts (REITs) in European real estate markets and use a Data Envelopment Analysis model to compare REITs and Real Estate Operating Companies (REOCs) from 2015 to 2017. Their research uncovers differences in debt maturity types and efficiencies between these entities, suggesting unexploited benefits of REITs in the EU [1, pp. 119-120]. However, the study lacks specific policy recommendations on REIT implementation.

Rizvi, Mirza, Naqvi, and Rahat analyze the effect of the Covid-19 pandemic on EU mutual funds, particularly focusing on risk-adjusted returns and investment styles during different phases of the pandemic. They find social entrepreneurship funds outperformed others, indicating a shift toward safer investments [2, p. 289]. The study provides insights but lacks generalizability beyond the limited data and time period.

Balp and Strampelli discuss the impact of the EU's sustainable finance regulations on asset managers, comparing their performance with counterparts in the US and globally [3, pp. 897-898]. They highlight the need for improved ESG ratings and indices and express concerns about the ability of institutional investors to promote sustainability without stronger regulations.

Rexhepi and Gashi study the growth of pension funds in new EU member states postreform. They find these funds positively influence local capital markets but caution against potential market distortions [4, pp. 450-451]. The authors recommend that policymakers support institutional investor development to bolster market growth, though the paper mainly focuses on the positives, neglecting potential drawbacks.

Daniels, Stevens, and Pratt address disparities in legal frameworks for private pension funds between the USA and the EU regarding sustainable investment. They observe that while Europe is more progressive in sustainable finance, both regions aim for longterm capital growth [5, pp. 260-261]. The study underlines the importance of legal frameworks but overlooks other influential factors.

Vukasina, Kersan-Skabic, and Orlic assess the impact of European Structural and Investment Funds (ESIF) on GDP per capita in new EU member states. Their research finds a minor positive effect but suggests that ESIFs shouldn't be the sole investment source [6, pp. 869-870]. The study lacks a detailed discussion on the allocation of ESIF investments across sectors.

Staehr and Urke explore the relationship between ESIF funds and public investment in EU member-states, particularly highlighting the Cohesion Fund's support for less developed countries [7, pp. 1053-1054]. They suggest more research into specific categories of public investment and influencing factors but do not provide a comprehensive analysis of these impacts across EU regions.

Lukovic, Pjanic, Cakajac, and Mitrasevic analyze trends in EU insurers' portfolio compositions amidst low interest rates. They observe a predominant focus on debt securities with variations across countries but exclude smaller insurance markets from their analysis [8, pp. 111-112]. The study highlights these trends without delving into the underlying reasons or potential risks.

Identification of previously unresolved parts of the overall problem

While the literature offers valuable insights into various aspects of institutional investor asset management in the EU, there is a notable lack of comprehensive policy recommendations, balanced assessments of benefits and risks, and extensive exploration of underlying factors and long-term impacts. These gaps present opportunities for further research to develop a more holistic understanding of the challenges and opportunities in this field.

Formulation of the objectives of the article

The article aims at examining and comparing key attributes, trends, and performance indicators across EU member-states to identify distinct groups. A critical aspect of this study is to identify patterns and commonalities among countries with similar levels of asset management development, as well as to pinpoint the unique characteristics of each cluster.

Summary of the main research material

The data in Table 1 illustrates the average values of financial assets of institutional investors as a percentage of Gross Domestic Product (GDP) across various European Union (EU) member states from 2017 to 2022. This table provides insights into the investment landscape of these countries, highlighting two key types of assets: investment funds and insurance corporations.

A striking observation is the significant variance in the total financial assets to GDP ratio among these countries. For instance, Denmark (225.0%) and France (194.5%) exhibit exceptionally high ratios, indicating a substantial penetration of institutional investment in their economies. On the contrary, countries like Lithuania (7.2%) and Greece (13.3%) show much lower ratios, suggesting a relatively smaller role of institutional investments in their economies.

Focusing on investment funds, Denmark (108.4%) and Sweden (99.7%) lead with the highest percentages of GDP. This could be indicative of a robust investment culture or favorable regulatory environments in these nations. In contrast, countries like Lithuania (2.6%) and Greece (3.3%) have the lowest percentages, which could be due to various factors including less developed financial markets or differing investment preferences.

Table 1