The Latest Research From FundForum USA 2012
The world is in flux for the asset manager’s and 2012 may be the year that the industry will wake up to this change. All in all, mutual funds have been a remarkably resilient business and the competition coming from ETFs, alternative products and other investment vehicles has taken industry participants by surprise. The shift within the advisory community from a commission to fee-based business, the subsequent pressure on asset managers’ profitability, not to mention a global economic environment of unprecedented volatility, are taking their toll and the industry is having to take a good long look in the mirror and rethink its value proposition. Different companies are taking different approaches to this change and time will tell who the winners and losers will be.
One effect of the current uncertainty has been a flurry of innovation in product development. The sudden realisation that the current product suite is not only losing investors, but in fact not meeting their basic requirements, has resulted in many firms adapting their offering in the attempt to attract the attention of home office analysts and individual financial advisors. The drive towards liquid and accessible vehicles, the scepticism surrounding the value of long-only mutual funds in an environment where active managers are not beating the benchmark, and price are all factors playing into the hands of ETFs.
ETFs have a lot of immediate appeal in terms of diversification, accessibility, liquidity and risk mitigation, not to mention fees. It is, perhaps, therefore not surprising that net new flows are going into ETFs. However, these products have also undergone their fair share of innovation and recently questions are being asked over the right utilisation of ETFs, around transparency and leverage in such products as synthetic ETFs or active ETFs.
On the other end of the spectrum, the traditional mutual fund is competing with an increasing number of absolute return products. These products’ promise of downside protection has been a very attractive draw for concerned investors. However, these products have sparked some controversy around their suitability and their ability to deliver on their promise, given the higher level of fees. There are questions around the real diversification they can offer: their lack of track-record within the regulated space does generate scepticism & financial advisors are faced with extra education and due-diligence considerations.
At the crux of this shift lies the fact that fee-based advisors are no longer incentivised to encourage clients to stick with their investment choices. In many cases, financial advisors are taking on a more discretionary role over their clients’ portfolios and, in all intents and purposes, acting as portfolio managers themselves. Such an advisor takes a very agnostic approach to their product selection process and will not hesitate to drop a manager on the grounds of poor performance if it is in their client’s interest. What is more. they have no particular bias towards mutual funds and are constantly on the look out for those products which add specific value to the overall portfolio. Churn and shorter holding periods are the new reality Asset Managers must operate in, which is having profound effects on their business revenue and profitability. No longer can they rely on the “buy-to-hold” mentality to make money.
Asset management firms have traditionally been very backward looking, valuing track-record and past performance as the benchmark for a good product. Buying on historical performance however is a very poor way of meeting the future needs of the investor, especially in an environment so radically different to that of 3 years ago. Sharing future market views with financial advisors is becoming a key requirement and an integral part of the sales process. It is becoming imperative for a fund management firm to take a stand on the future in order to gain credibility with the gatekeepers.
The requirements of the leading wirehouses are changing in more ways than one: this business has become increasingly institutional in nature, with home-offices operating their manager and fund selection much like a large investor would. A grasp of modern portfolio theory, consistency of process and a clear commitment to an investment philosophy are increasingly valued by the fund selector. The end-user wants outcome-oriented solutions not individual products, and a manager has to be nimble enough to offer expertise across all asset classes and markets. If this is beyond their capability, a manager will need something pretty spectacular to get noticed, hence the emergence of a handful of small niche conviction managers with a single product which can plug a gap within a model portfolio. But generally, the added pressure for flexible and comprehensive product offerings is playing heavily in favour of those companies with the resources and capabilities to provide what the gatekeeper needs. This channel may still be where big business is found, but the opportunities are noticeably shrinking.
But all is not desperate for traditional active managers looking for opportunities in the retail space. The growth of the RIA sector has been one clear outcome of the crisis: clients, disillusioned by the well-known financial institutions and the service they were offering, are now requesting a more personalised, bespoke service. Concurrently, advisors within these financial institutions have shown entrepreneurial initiative and set up alone and taken their clients with them. These advisors are particularly product agnostic, constantly looking for best-of-breed managers to compliment an existing discretionary portfolio. At the HNWI end of the spectrum, Private Bankers are starting to shun their traditional role as stock pickers and instead embrace funds, especially given the increased understanding of global and multi-asset diversification amongst more sophisticated clients.
What Lies Ahead?
The institutionalisation of the retail business may have heightened the importance of the relationship between the home-office and asset managers, but re-aligning interests between asset managers and their end-investors is the message being conveyed to the industry loud and clear. For too long, fund management firms have been overly focussed on their immediate clients, the gatekeepers at the big warehouses, and have potentially lost sight of the final part of the equation – the investor him/herself. Managers don’t do a good enough job at researching who their investors are, what their investors are interested in & how they invest. More client segmentation and product alignment will make for stickier money and a more profitable business in the long run. Those who have the nerve to withstand current volatility, adapt their business to suit this new environment, may well find themselves the winners of tomorrow.
This paper was written on the basis of research conversations with over 60 asset managers and advisors concentrating on the principal considerations they are facing in 2012. For a more expert and in-depth debate around these topics, FundForum USA will be engaging the industry’s leading CEOs, CIO, their clients from the large wirehouses and RIAs to deliberate, challenge and provide solutions to these issues and more.
For further information on FundForum USA, click here to visit the website.
