Total estimated inflows into long-term mutual funds were $12.39 billion for the week ended Wednesday, May 8, according to the Investment Company Institute (ICI). Although overall sales have remained in positive territory, this week's total broke the downward trend occurring since March 20 when inflows reached $12.38 billion. All broad asset classes experienced inflows with the exception of Municipal Bond, which experienced $263 million in redemptions. Taxable Bond led sales with approximately $7.7 billion in net inflows followed in a distant second by World Equity’s $3.1 billion intake. Hybrid funds gathered $1.5 billion, which is on par with its overall sales throughout the year with the exception of last week’s record $6.5 billion intake. Domestic Equity managed to reverse its outflows from the prior week by gathering $378 million in net inflows.
Source: Investment Company Institute
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1) European ETP Assets Set to More than Double by 2017, Says iShares
Fundweb | 4/26/2013
Because… iShares’ optimism may lead more foreign ETP managers to compete in the European market, which has lagged behind its U.S. counterpart in both size and product sophistication. U.S.-listed ETPs accounted for 71% of global ETP assets at the end of April, whereas European ETPs represented only 18% of the global total. This year through the end of April, European ETPs raised $6.7 billion of assets, compared to the $65.6 billion absorbed by U.S. ETPs. iShares dominates the European market with a 40% share, but other leading ETF providers in the U.S., including SSgA and Vanguard, have not established a significant presence in the region.
2) Mutual Fund Boutiques Find Success, Challenges
On Wall Street | 4/29/2013
Because… For small investment boutiques, the expertise of managing money does not always translate into the success of gathering assets. Although many research studies have proved the outperformance of small money managers, these entrepreneurial firms face daunting hurdles in raising assets due to their unknown brands and lack of marketing resources. While smaller managers need to maintain their focus on delivering value to shareholders regardless of market conditions, it is more important for them to identify distribution partners and get their funds onto different platforms in order to broaden their reach to the investing public.
3) Nationwide Financial Adds Four New Managed Volatility Funds to Core VA Line-Up to Help Investors Address the "New Normal"
Nationwide | 5/1/2013
Because… Offering managed volatility funds has become an emerging trend in the variable annuity (VA) world. Besides Nationwide, asset managers such as BlackRock, Calvert, and Fidelity have also introduced managed volatility funds for their VA products this year. As insurance companies are increasingly focusing on risk management, the target volatility asset allocation strategy is considered an effective tool that can benefit both investors and insurers. In particular, volatility management limits exposure to tail risks and lowers the cost of VA guarantees, making it a valuable solution for insurance carriers.
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Total estimated inflows into long-term mutual funds were $3.07 billion for the week ended Wednesday, May 1, according to the Investment Company Institute (ICI). This cumulative total represents the lowest sales intake since the first week of January when sales were in the red. Equity funds contributed to the drag, with Domestic Equity experiencing nearly $4.1 billion in redemptions and World Equity posting $319 million in net outflows. Taxable Bond only managed to gather a mere $888 million in net inflows while its Municipal counterpart took in a paltry $73 million. Meanwhile, Hybrid funds led sales with a record $6.5 billion in net inflows, indicating investors were not willing to bet on either stocks or bonds.
Source: Investment Company Institute
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Total estimated inflows into long-term mutual funds were $8.42 billion for the week ended Wednesday, April 24, according to the Investment Company Institute (ICI). This cumulative intake represents a 55% increase from last week’s total of $5.44 billion. All broad assets classes garnered inflows with the exception of Domestic Equity, which fell into the red by $608 million. World Equity collected $1.9 billion, pulling overall stock funds into positive territory. Taxable Bond led sales with $5.6 billion, while its Municipal counterpart only managed to collect $133 million in net inflows. Hybrid funds gathered nearly $1.4 billion, on par with last week’s total which was restated from $246 million in net outflows to $1.3 billion in net inflows.
Source: Investment Company Institute
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Total estimated inflows into long-term mutual funds were $3.66 billion for the week ended Wednesday, April 17, according to the Investment Company Institute (ICI). Dropping 21% from last week’s intake, sales have been on a downward trend since the week ended March 20 when inflows reached $12.38 billion. Hybrid funds, which have been garnering steady inflows throughout the year, fell into the red with $246 million in net outflows. Municipal Bond led outflows with $698 million, while Taxable Bond led sales by gathering $2.2 billion—its third lowest total to date this year. With $1.7 billion in net inflows, Domestic Equity experienced its best week since January 30. On the other hand, World Equity managed to collect $645 million, but this represents its lowest intake since the week ended January 2.
Source: Investment Company Institute
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1) CIBC to Acquire Atlantic Trust Private Wealth Management
Invesco | 4/11/2013
Because… Just as other asset management firms are wooing private wealth business, Invesco is offloading Atlantic Trust to concentrate more on growing its retail and institutional assets. Considered a non-core business by Invesco, Atlantic Trust will help CIBC break into the U.S. private wealth market. With its nationwide presence, strong investment results, high quality client service, and powerful brand, Atlantic Trust can be a valuable addition to Canadian-based CIBC.
2) Designing a Better DC Investment Menu
Plansponsor | 4/18/2013
Because… The white paper, authored by several industry experts, recommends tiered investment structures for DC plan menus. Such tiers can be effective because they take participant behavior profiles into consideration. Plan sponsors traditionally offer the same investment options to all their plan participants, but they need to recognize different levels of participant involvement. A tiered structure gives self-directed investors more choices while simplifying the decision-making process for unsophisticated participants.
3) SEI Study: Active Exchange Traded Funds Will Help Fuel Sector's Next Growth Phase
SEI | 4/22/2013
Because… We concur that actively managed ETFs will drive growth and innovation in the ETF evolution. Quite a few asset managers have received regulatory approval for launching active ETFs. With the success of PIMCO Total Return ETF and the SEC’s permission to use derivatives, we expect more active ETFs to be brought to the market in the next couple of years, especially in the fixed-income space.
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Total estimated inflows into long-term mutual funds were $4.83 billion for the week ended Wednesday, April 10, according to the Investment Company Institute (ICI). This total marks the lowest intake since the first week of 2013, when net flows fell into negative territory, and a dramatic decrease from the high of $26.6 billion during the week ended January 9. Despite generating nearly half of the cumulative sales, Taxable Bond only gathered $2.7 billion compared with $6.4 billion during the prior week. Falling into the red for the third time this year, Municipal Bond experienced net outflows of $857 million. On the other hand, World Equity gathered $1.2 billion, and its domestic counterpart collected $405 million—a reversal from net outflows of $1.8 billion during the prior week. Representing a 19% increase from the prior week, investors put nearly $1.4 billion into Hybrid funds.
Source: Investment Company Institute
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1) Guggenheim to Add Four BulletShares ETFs
SEC Filings | 4/9/2013
Because… Target maturity bond funds, with attributes of both traditional bond funds and individual bonds, are relatively new in the fixed-income space. Guggenheim, which currently offers eight BulletShares corporate bond ETFs and six BulletShares high yield corporate bond ETFs, has become a leader in this niche market. The firm had $2.3 billion of assets in this fund series as of the end of March. The declining interest rate risk sensitivity, low turnover rate, and low trading costs make these funds very appealing, especially in a rising interest rate environment.
2) Vanguard Expands Availability of Low-Cost 401(k) Plan Service for Small- to Mid-Size Businesses
Business Wire | 4/10/2013
Because… Small plan sponsors generally select plan providers based on the diversification of investment options, brand name awareness, and compliance support. Their choice of plan providers is usually limited because of the small size of their plan. Vanguard, with its low-cost products, reputation for high quality services, and the collaboration with Ascensus, should be able to gain traction in the fast-growing small plan market segment.
3) Average Expense Ratios Paid by Mutual Fund Investors Continued to Decline in 2012
ICI | 4/11/2013
Because… Investors are benefitting from lower expense ratios, but the downward trend is putting tremendous pressure on fund firms. Several factors may continue to bring expense ratios down. First, investors are increasingly putting money into low-cost funds, as they have realized the impact of expense ratios on a fund’s total return. Second, ETF sponsors’ price reduction initiatives are forcing mutual fund managers to revisit their pricing policies in order to stay competitive. Third, fund mergers and acquisitions are creating economies of scale, which will generate more cost efficiency.
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Total estimated inflows into long-term mutual funds were $8.84 billion for the week ended Wednesday, April 3, according to the Investment Company Institute (ICI). Taxable Bond was responsible for nearly three-quarters of the cumulative intake, with nearly $6.4 billion in net flows. Although Municipal Bond only managed $73 million in net inflows, the total represents a 35% increase from the prior week. Investors poured nearly $3.1 billion into World Equity, while Domestic Equity fell back into the red with $1.8 billion in net outflows after three weeks in positive territory. With $1.1 billion in net inflows, Hybrid funds experienced its lowest weekly intake since suffering outflows during the first week of January.  Source: Investment Company Institute
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1) Nationwide Financial Agrees to Acquire 17 Funds with $3.6B in Assets from HighMark Capital
Nationwide | 4/3/2013
Because… In spite of handing over 17 funds to Nationwide, HighMark will remain as the sub-advisor to nine funds it currently manages. This indicates smaller asset managers would rather focus exclusively on investment management than compete for shelf space with limited distribution resources. For Nationwide, which has developed a penchant for fund adoption, its marketing muscle and recently expanded sales team may help adopted funds gather assets at a faster pace.
2) AQR to Add Two Alternative Funds
SEC Filings | 4/3/2013
Because… AQR has established itself as a fast-growing alternative asset manager in the mutual fund space. With $3 billion of net inflows in 2012, the firm’s assets in retail mutual funds surpassed $10 billion as of the end of February. AQR already offers the Managed Futures Strategy Fund, with $3 billion in assets. The fund raked in $1 billion in 2012, while the Dow Jones Credit Suisse Managed Futures Index lost 5.51%. The newly filed AQR Managed Futures Strategy HV Fund adopts a “higher volatility” approach. We’ll watch whether this strategy will resonate with investors.
3) KKR to Carlyle Target $3.6 Trillion in 401(k)s Accounts
Bloomberg | 4/4/2013
Because… The idea of private equity firms serving the "Average Joe" was unthinkable just a couple of years ago. Now these firms are setting their sights on individual investors because it is becoming increasingly hard to raise assets from accredited institutional investors. We’ve seen private equity firms launch their own ’40 Act funds or team up with traditional asset managers to develop new products. However, they could have a long way to go before gaining acceptance in the 401(k) market due to concerns from plan sponsors, participants, service providers, and regulators.
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Total estimated inflows into long-term mutual funds were $9.12 billion for the week ended Wednesday, March 27, according to the Investment Company Institute (ICI). This total intake represents a 26% decrease from the $12.38 billion accumulated during the prior week. All broad asset classes experienced inflows; however, at decreased levels from the prior week with the exception of Municipal Bond and Hybrid funds. Municipal Bond was able to reverse outflows of $278 million and managed to gather $51 million in net inflows during the week. With $1.8 billion in sales, Hybrid funds increased its net flows from the prior week by 29%. Regarding the asset classes that experienced a drop from the prior week, Taxable Bond led sales with $3.4 billion in net flows—a 45% decrease from the prior week. Investors put $2.8 billion in World Equity funds despite a 24% decrease. Domestic Equity only managed to gather $958 million, a one-quarter dip from sales during the prior week.
Source: Investment Company Institute
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1) Retirement Assets Total $19.5 Trillion in Fourth Quarter 2012
ICI | 3/27/2013
Because…When we took a look at the ICI data, which include U.S. retirement assets since 1974, we discovered that assets held in IRAs, DC plans, federal pension plans, and annuities all reached a record high at the end of 2012. Also climbing to an all-time high are DC assets in 401(k), 403(b), and 457 plans; IRA assets in mutual funds, bank and thrift deposits, and annuities; and assets in target-date funds and target-risk funds.
2) USAA Plans to Offer Active ETFs, Details 14 Funds
IndexUniverse.com | 4/2/2013
Because… USAA, which primarily serves military members, is joining a long list of asset managers to offer ETFs. On the one hand, it shows the appeal of ETFs. For a firm with $54.9 billion in mutual fund assets and $14.5 billion in managed accounts, we applaud its effort to provide a complete suite of products. On the other hand, we wonder whether USAA can turn up trumps in the ETF space. Its success will depend on how its ETFs differ from existing offerings in the market, how much its military clients know about ETFs, and if the firm wants to attract non-military investors.
3) Hedge Fund Industry Survey Reveals More than One-Third of Professionals Feel Pressured to Break the Rules in Pursuit of Alpha
PR Newswire | 4/2/2013
Because… While the pursuit of alpha is understandable, the survey result that revealed 35% of hedge fund professionals felt pressure to break the rules is appalling. Scandals involving insider trading, insufficient disclosure about complex products, misleading behaviors in product offerings, hiding losses and diverting investor funds for personal use are fueling investor distrust. Increased regulatory scrutiny and tighter enforcement of laws are not enough to restore investor trust. Ensuring that asset managers act with integrity and self-discipline is crucial.
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1. In an amazing piece of brand positioning, it is believed that ING has decided not to use a sailboat OR a lighthouse in its new positioning (large birds of prey and marine mammals are still thought to be under consideration).
2. In a series of recent press releases, it was reported that Blackrock's Larry Fink likes the outlook for equity and bond funds as well as alternative strategies...in ETF or traditional mutual fund formats.
3. As expected, Frank Campanale has filed to launch mutual funds under the E.F. Hutton brand with plans to take over as CEO of Paine Webber, Kidder Peabody, Dean Witter and Mitchell Hutchins.
4. Some of the merger possibilities that are thought to be in the works include:
• 1492 and 1838 combine to form 3330
• ALPs, Alpine, Everest, Matterhorn Growth Fund and the offerings from McKinley and Adirondack combining under the "Von Trapp" brand (you know...the song..."Climb Every Mountain")
• Janus Enterprise brings on Vulcan (Investment Partners) to round out leadership team
• Two Oaks and Longleaf and Sequoia and Oak Associates are in talks...team from Forester has been cut loose
• Pioneer and Scout in a battle over New Frontiers
• NY Yankees tried to buy the Pennant Funds, as they do every year since 2009 (won WS in 2008), but with nothing to show for it. The team was hoping to use insurance money from Alex Rodriguez contract to fund the purchase. On a positive note, at least the team has reached the midpoint of the Alex Rodriguez contract and only owes him $135 million more over the next five year.
5. After completing an acquisition of an investment management company (FBR) that was 3 times the size of his mutual fund firm, Neil Hennessey is now looking for firms that are 20 times larger which would include the retail investment arms of firms like Goldman Sachs and GMO.
6. Durable portfolio construction has been front tested by United Laboratories and was found to dramatically reduce the impact of a crash.
7. After an exhaustive three month project in which they thoroughly evaluated each of the 15 most successful fund groups of 2012, consultants at McKinsey are reported to have concluded that all of their clients should change their structure to that of a not-for-profit...or bring out well known and low cost ETFs or have a reputation for consistently delivering above average performance or to combine a +30 year presence in the intermediary space covered by at least 50 wholesalers with a broad and high quality product line.
8. A consortium of academics from Sloan, Harvard and Wharton have produced the definitive research piece on investment performance in which they concluded that investors whose investment portfolios consistently produce higher than average returns tend to have more money, on average, for retirement.
9. Two New York area research firms conclude that the proliferation of professional buyers and the use of pre-packaged asset allocation models and widespread access to detailed product/performance data will have no impact on their recommendations that more wholesalers and better websites are the key to successful asset gathering.
10. Nominees for the 2013 "All Religious" team were recently announced with the winner to be selected by secret ballot on June 25th - they include Praxis, Ava Maria, Guidestone, Thrivent, New Covenant and Matthew 25.
HAPPY APRIL FOOL'S DAY!
FUSE Research
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1) SEC Approves Payments on Nasdaq for Making Markets in Some ETFs
Bloomberg | 3/22/2013
Because… While the incentive program intends to keep ETF trading spreads narrow and enhance liquidity of thinly-traded funds, some in the industry fear that relying on market makers to build volume and stimulate liquidity is not conducive to promoting a fair, orderly, efficient market. Allowing fund sponsors to compensate market makers would create a pay-to-play environment, and liquidity rebates would also pose a conflict of interest between market markers and ETF providers.
2) Majority of Active Managers Underperform Indices
Financial Planning | 3/26/2013
Because… Another year passed with passively managed funds winning the performance derby. While this result does not surprise asset managers any more, it serves as a reminder that they must find solutions to meet the challenge of passive management. Some firms have restructured investment divisions, improved the quality of the talent pool via team lift-outs, launched new products to get ahead of the curve, or even have chosen to join the ETF fray. In the end, asset managers need to focus more on helping the public enhance their investing experience.
3) Legg Mason Survey Finds Investor Expectations for Income Disconnected from Market Realities, Creating Income Gap
Legg Mason | 3/26/2013
Because… The survey found that almost three-quarters (74%) believed "now is a good time to be invested in equities," but 52% added that they are more inclined to use equities to generate income. These survey respondents neglected one of the main objectives of equity investing – capital appreciation. Recent data from Spectrum Group show that the number of U.S. households with a net worth of $1 million or more rose to 8.99 million from 8.6 million in 2011, and a key factor for the increase is millionaire households stayed in the stock market.
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Total estimated inflows into long-term mutual funds were $7.57 billion for the week ended Wednesday, March 13, according to the Investment Company Institute (ICI). This total intake represents a 36% decrease from sales accumulated during the prior week. In quite the reversal, Equity funds led sales with nearly $3.9 billion in net inflows, with World Equity responsible for the lion's share with $3.0 billion in sales. Hybrid funds gathered approximately $2.1 billion—on par with its weekly sales intake since the beginning of the year. On the other hand, Bond funds only garnered $1.6 billion, a dramatic decrease from the $6.4 billion in net inflows during the prior week. For the first time this year, Municipal Bond fell into the red with $335 million in net outflows, while Taxable Bond only gather $1.9 billion in net inflows.
Source: Investment Company Institute
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1) Fidelity and BlackRock Announce Groundbreaking ETF Strategic Alliance
Fidelity | 3/13/2013
Because… The alliance between the industry’s two giants will benefit both firms. iShares, already a top ETF sponsor with nearly 40% of market share, will be able to leverage Fidelity’s distribution prowess. Fidelity, a latecomer to the ETF game, will expand its presence with iShares’ assistance in product development. However, how iShares can help Fidelity grow the sector ETF business and whether investors would prefer an open architecture with various ETF providers remain to be seen.
2) SEC Issues Guidance Update on Social Media Filings by Investment Companies
SEC | 3/15/2013
Because… The SEC gave specific examples of what types of communications that generally need and need not to be filed. Financial service firms have been taking a conservative approach and proceeding very carefully with regard to the use of social media in order to avoid regulatory violations. The SEC’s clarification provides firms with a better sense of filing rules and allows them to use discretion in the disclosure of more general statements.
3) Younger Generations Struggle to Accumulate Wealth
Plansponsor | 3/15/2013
Because… Financial firms need to focus on helping younger generations with asset-building. Today’s younger generations have gone through a series of financial debacles and may have lost confidence in the financial system even before they start wealth accumulation. Unlike older generations, the lack of trust and commitment is pervasive among these investors. They tend to have more faith in themselves than outside sources of assistance, which could be a challenge for both advisors and asset managers.
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Total estimated inflows into long-term mutual funds were $11.85 billion for the week ended Wednesday, March 6, according to the Investment Company Institute (ICI). This total intake represents a 41% increase from sales accumulated during the prior week. Taxable Bond led sales with nearly $6.1 billion, its highest intake since the week ended January 23. Meanwhile, Municipal Bond continued on a downward trajectory with only $361 million in net inflows. Investors pulled $578 million from Domestic Equity—its second consecutive week in the red. However, Word Equity garnered $3.5 billion in net inflows, representing a 61% increase from the prior week. With nearly $2.5 billion in net inflows, Hybrid funds continued its increasingly positive course.
Source: Investment Company Institute
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According to Kathy Freeman Company's Fourth Annual Executive Survey "Attracting and Retaining Human Capital: Are You Ready to Compete," top executives in investment management and wealth management are more satisfied than they have been since the beginning of the financial crisis. In just four years, senior sales and marketing executives have gone from being mostly dissatisfied to being mostly satisfied with their current position. To attract talent, firms will need to offer equity more frequently and act more decisively than they have in the recent past when a compelling candidate has been identified. To retain talent, firms will need to link compensation more closely to performance and create opportunities for executives to develop new ideas, products and solutions. Contrary to what some believe, it is not a buyer’s market for talent. Executives will only move if they perceive the firm as a partner in their long-term future. For more information, please click on the link the full report.
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1) Fidelity Reports 34 Percent Increase in Small to Mid-Market Defined Contribution Sales in 2012 Totaling $8.4b in Assets
Fidelity | 3/5/2013
Because…Targeting smaller retirement plans is not only helping people who work for smaller businesses save for retirement but also benefiting retirement plan providers. Since DC assets are highly concentrated in larger retirement plans, financial firms tend to dedicate more resources to large plans. However, large plans typically exert their bargaining power over costs and require custom services and product solutions. For the smaller plan segment, services can be more standardized, smaller businesses have greater growth potential, and the participation rate is low, which all present opportunities for service providers.
2) Global ETFs, ETPs Rake in $11 Billion
Financial Planning | 3/7/2013
Because…Three facts for February global ETP flows are noteworthy. First, equity ETP flows in the first two months of 2013 were the strongest January-February total on record, according to BlackRock. Second, U.S.-listed ETPs dominated both February and YTD flows, with Europe ranking as a distant second. The disparity will continue and drive ETF sponsors to exploit overseas markets. Third, Vanguard, a low-cost provider, accounted for half of February flows.
3) Social Security Misconceptions Threaten Middle-Income Americans' Financial Security, New Study Says
PR Newswire | 3/12/2013
Because… Financial firms need to focus more on middle-income Americans. In addition to their dependence on Social Security, these people are less likely to save for retirement because of other financial obligations. The fear of market uncertainties and the distrust of financial intermediaries are also factors in their decision to postpone retirement saving. Therefore, financial firms should change this cohort's mindset from relying on Social Security or employers to taking personal responsibility, help them determine their retirement needs, and equip them with knowledge and guidance that fit their needs.
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Total estimated inflows into long-term mutual funds were $8.43 billion for the week ended Wednesday, February 27, according to the Investment Company Institute (ICI). After seven consecutive weeks of positive sales, Domestic Equity fell into the red with $1.1 billion in net outflows. World Equity gathered nearly $2.2 billion, but this total represents its lowest intake since suffering outflows during the first week of the year. Taxable Bond continued to lead sales with $4.4 billion in net inflows, while its Municipal counterpart only managed to garner $579 million. With nearly $2.4 billion in net inflows, sales into Hybrid funds increased 18% from the prior week.
Source: Investment Company Institute
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1) ProShares Launches Listed Private Equity ETF
ProShares | 2/28/2013
Because… ETF sponsors are increasingly turning their attention to alternative strategies or asset classes. In addition to ProShares' launch, First Trust introduced a high yield long/short ETF on the last day of February. Van Eck also filed for long/short ETFs last week. Alternative ETFs have not generated strong asset flows because most investors lack the sophistication to gain a deep understanding of these funds. So for ETF managers, developing innovative products is not enough. Education on risk/return characteristics of different alternative ETFs and their use in portfolio construction will determine investors’ adoption of such funds.
2) FPA Announces Conversion to No-Load Fund Family
FPA | 3/1/2013
Because… It is unusual for a fund company to convert from load to no load. FPA offers six funds, some of which have very attractive long-term performance. By eliminating front-end loads for all four funds (the other two, including the well-known FPA Crescent, are already no-load), FPA will benefit investors who have no interest in load funds. However, broadening the fund distribution in the direct channel could be challenging for a firm that has neither invested in marketing nor paid retail brokerages for shelf space. We wish FPA best of luck!
3) EBSA Offers Tips for Selecting TDFs
Planadviser | 3/4/2013
Because…The DOL guidance urges plan fiduciaries to inquire about whether a custom or non-proprietary target-date fund would be a better fit for the plan. This could provide opportunities for providers of custom target-date funds. Advantages of custom target-date funds include improved diversification for participants, modified glidepaths to accommodate specific participant needs, and the potential of lowering plan costs by negotiating fees with separate investment solution providers.
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Total estimated inflows into long-term mutual funds were $11.29 billion for the week ended Wednesday, February 20, according to the Investment Company Institute (ICI). This marks the seventh consecutive week of inflows; however, sales continue on a downward trajectory from the high of $26.56 billion accumulated during the week of January 9. Taxable Bond led sales with $4.1 billion in net inflows, on par with its intake during the prior week. On the other hand, the $590 million in sales into Municipal Bond funds represented a 30% decline from the prior week. Investors poured approximately $3.5 billion into World Equity and $1.1 billion in Domestic Equity, nearly doubling domestic stock’s intake during the prior week. Once again, Hybrid funds continue on a steady roll with $2.0 billion in net inflows.
Source: Investment Company Institute
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1) Schwab ETFs Achieve New Milestone: $10 Billion in Assets Under Management
Schwab | 2/21/2013
Because… Hitting the $10 billion mark in three years is a remarkable achievement. Schwab’s product line of broad market-based ETFs, market positioning as a low-cost ETF provider, its network of about 7,000 RIAs, and educational efforts to enhance investors’ understanding of ETFs have all contributed to the success. Schwab ranked #11 based on ETF assets as of 12/31/12. While the firm will not pose a threat to the top players any time soon, it has become a serious competitor in the ETF arena.
2) State Street Unveils Low Volatility SPDR Exchange Traded Funds Offering Targeted Exposure to Small and Large Cap Equities
SSgA | 2/21/2013
Because… Besides SSgA, Invesco PowerShares launched two low-volatility ETFs a week ago. The introduction of new funds and the popularity of existing low volatility funds from PowerShares and iShares indicate that low-volatility strategies are still in demand even though market volatility has recently been at a low level. Low volatility funds tend to outperform in bear markets and underperform in bull markets. Fund managers need to provide guidance on whether the fund is suited for a long-term, core holding or a short-term, opportunistic tactic.
3) Artisan Partners Announces New IPO Plans
Pensions & Investments | 2/26/2013
Because… Artisan has maintained an investment-centric culture since its founding in 1994. While its commitment to producing attractive returns will not be changed after becoming a public company, we expect to see heightened analyst and investor scrutiny to reduce its fees. If fund expense ratios are trimmed, the firm will have to expand investment capabilities to diversify the source of revenue generation and maintain business growth and profitability.
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Total estimated inflows into long-term mutual funds were $12.69 billion for the week ended Wednesday, February 13, according to the Investment Company Institute (ICI). This total intake represents a 10% decrease from sales accumulated during the prior week. World Equity led sales with $5.2 billion in net inflows followed by Taxable Bond with $4.1 billion. Their Domestic and Municipal counterparts lagged dramatically with only $509 million and $840 million in net flows, respectively. Meanwhile, Hybrid funds continue on a steady roll with $2.0 billion in net inflows.
Source: Investment Company Institute
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1) PIMCO to Launch Foreign Currency Strategy Exchange Traded Fund
PIMCO | 2/8/2013
Because… This actively managed fund may dominate the currency ETF market. PIMCO’s brand will help the fund raise assets, and the multi-currency ETF space is wide open with little competition. However, currency ETFs are not expected to benefit long-term investors because currencies do not generally follow an upward trend over a long period of time. This, combined with currency ETFs’ fairly high expense ratios due to high turnover, suggests the new fund may not achieve the same level of success as PIMCO Total Return ETF, which was launched last February.
2) BlackRock Says Reviewing ETF Index Contracts, Nothing 'Imminent'
Reuters | 2/11/2013
Because… If BlackRock eventually switches to low-cost index providers, it will be a huge blow for MSCI, as BlackRock accounted for 8% of its revenue in 2011. Vanguard already bid adieu to MSCI and adopted lesser-known FTSE and CRSP indexes. The change has not prevented the firm from bringing in new assets. Its ETFs collected $10 billion in January. The move by industry leaders will prompt other ETF providers to follow suit, which will put increasing pressure on major index providers, such as S&P, Dow Jones, and MSCI.
3) American Funds Back in the Black, Boosted by Shift to Equities
Investment News | 2/12/2013
Because…American Funds remained the second largest fund firm, although it had experienced massive redemptions in the past four years. January’s net inflows are a positive sign after investors yanked $61.6 billion in 2012 and $81.5 billion in 2011, but it is too early to pat the firm on the back for the improved sales. American Funds is still facing tremendous challenges before it will regain its lost glory, which include the shift to passively-managed ETFs, the rise of alternative investments, and the delivery of a differentiated value proposition that meets evolving investor demands.
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Total estimated inflows into long-term mutual funds were $13.79 billion for the week ended Wednesday, February 6, according to the Investment Company Institute (ICI). Bond funds led sales with $6.0 billion in net inflows, with Taxable Bond’s $5.4 billion intake responsible for the lion’s share. World Equity carried the weight for stock funds this week by garnering nearly $5.1 billion in net inflows, while Domestic Equity only managed to collect $683 million—a dramatic decrease from the $3.5 billion in sales during the prior week. Investors poured $2.0 billion in Hybrid funds, which is on par with its weekly sales since the week ended January 9.
Source: Investment Company Institute
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1) Alternative Investments Pose Challenges to Advisors
Financial Advisor | 2/4/2013
Because… With the complexity of alternative investments and lack of sufficient knowledge, performing due diligence on non-traditional strategies and asset classes has become a tough task for advisors and average investors. Several firms have embarked on road shows to introduce alternative funds, but more alternative fund providers need to take an active role in advisor and investor education. They should dissect investment approaches, expose potential risks, and discuss implications of specific exposure to provide a better sense of whether they should invest in alternatives and how to allocate assets to alternatives.
2) Fidelity and Extend Health Partner to Help Retiring Employees Transition to Private Health Coverage
Fidelity | 2/5/2013
Because… The rising health care cost has become the top retirement concern among investors. To help people save for the future health care, financial firms need to make them aware of the importance of health care planning as Medicare only covers about 48% of health care costs on average for enrollees. Firms should also encourage advisors to initiate conversations with their clients on health care-related issues, such as the role of Medicare and estimated medical expenses in retirement.
3) Vanguard to Introduce Low-Cost International Bond Index Fund and ETF
Vanguard | 2/6/2013
Because… After filing for the International Bond Index Fund in October 2011, Vanguard postponed the fund launch twice in 2012. The delay has driven some investors to other providers of foreign bond funds. Now that the new fund will be brought to the market with very low expense ratios and hedging strategies to reduce the impact of currency fluctuations, we expect the fund to reignite investor interest.
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Total estimated inflows into long-term mutual funds were $14.33 billion for the week ended Wednesday, January 30, according to the Investment Company Institute (ICI). This represents the fourth consecutive week of net inflows; however, inflows have been on a downward trajectory from its high of $26.56 billion for the week ended January 9. With nearly $4.7 billion in net inflows, World Equity drove sales followed by Domestic Equity’s intake of $3.5 billion. Meanwhile, investors put slightly more money into Hybrid funds ($2.65 billion) versus Taxable Bond ($2.63 billion). Municipal Bond garnered $874 million in net inflows, representing a 38% decrease from its intake during the prior week.
Source: Investment Company Institute
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Total estimated inflows into long-term mutual funds were $16.32 billion for the week ended Wednesday, January 23, according to the Investment Company Institute (ICI). This total intake represents a 26% decrease from cumulative sales during the prior week. All broad asset classes gathered inflows for the third consecutive week with Taxable Bond driving sales of $6.6 billion in net inflows. This was followed by nearly $3.5 billion and $2.9 billion gathered by Domestic Equity and World Equity, respectively. Investors put $1.9 billion into Hybrid funds, slightly surpassing the $1.4 billion garnered by Municipal Bond funds.
Source: Investment Company Institute
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Total estimated inflows into long-term mutual funds were $22.04 billion for the week ended Wednesday, January 16, according to the Investment Company Institute (ICI). Stocks gathered inflows for the second consecutive week, with Domestic Equity gathering $5.0 billion and World Equity nearly $4.3 billion. However, bonds led sales by a small margin, collecting nearly $10.6 billion. With $8.4 billion in net inflows, Taxable Bond led all broad asset classes while Municipal Bond collected $2.2 billion. Hybrid funds, which garnered $2.1 billion in net inflows, experienced a 24% decrease from its $2.8 billion intake during the prior week.
Source: Investment Company Institute
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1) Aon Hewitt Survey Reveals Employers Making Retirement Readiness a Top Priority
Aon Hewitt | 1/16/2013
Because…A Deloitte report published in December 2011 found that only 20% of employers felt very responsible for preparing employees for retirement, whereas the most recent Aon Hewitt study revealed that 80% of employers are making financial wellness a top priority in 2013. This positive change indicates employers are no longer content with just offering a sound retirement plan. They are taking a more involved approach to help plan participants get ready for retirement.
2) SPY@20: First U.S. ETF Changed Investing
IndexUniverse.com | 1/18/2013
Because… Today is SPDR S&P 500 ETF’s 20th birthday. While we sing Happy Birthday, we can’t help taking a look at what the lone ETF two decades ago has become. SPY, boasting assets of $124 billion, is the largest fund in the ETF industry. It garnered $20 billion in 2012, nearly double the flows into the next best-selling ETF. With its low expense ratio, high trading volume, tight bid/ask spread, and minimal tracking error, the fund will continue to thrive and lead the $1.4 trillion industry to new heights.
3) Investors Are Most Optimistic on Stocks in 3 1/2 Years
Bloomberg | 1/22/2013
Because… Though the Bloomberg survey showed the stock market optimism among international investors, we have reason to assume U.S. investors are sharing the same sentiment. According to ICI, Domestic Equity mutual funds absorbed $8 billion in the week ended 1/9/13, compared to estimated outflows of $10 billion in the previous week. The shift to equities, if sustained, is significant because the asset class had experienced substantial redemptions for consecutive years. Asset management firms need to steer investors to equities, and meanwhile, caution against performance-chasing.
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Total estimated inflows into long-term mutual funds were $27.5 billion for the week ended Wednesday, January 9, according to the Investment Company Institute (ICI). The first full week of trading week in 2013 resulted in the highest closes for approximately four years, largely as a result of positive sentiment due to Congress’s budget deal to avert the fiscal cliff in addition to improved employment numbers. Investors poured nearly $8.0 billion in Domestic Equity and $6.8 billion in World Equity, surpassing the $9.8 billion garnered by fixed income. Taxable Bond gathered $7.3 billion while Municipal Bond collected nearly $2.5 billion. Hybrid funds experienced positive momentum with nearly $2.9 billion in net inflows. Whether or not the tides will turn from a bear market remains to be seen.
Source: Investment Company Institute
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1) BlackRock to buy Credit Suisse's European ETFs
Reuters | 1/9/2013
Because… The acquisition of Credit Suisse’s ETF business will increase iShares’ market share in Europe from 38% to 43%. If combined with Credit Suisse’s $18 billion, iShares’ assets would more than triple the assets of Europe’s second largest provider, db x-trackers. Since Credit Suisse was the second largest physical ETF provider in the region, the deal will give iShares control of 75% of the European physical ETF market, according to ETFGI. iShares’ dominance means reduced competition and limited investor choice of providers.
2) J.P. Morgan Asset Management to Increase Disclosure of Market-Based Net Asset Values (NAVs) for Three U.S. Money Market Funds
PR Newswire | 1/9/2013
Because… Seven large firms will disclose market-based NAVs for their money market funds, including Fidelity, Federated, BlackRock, Schwab, BNY Mellon, and Goldman Sachs. The more frequent disclosure shows fund firms are making an effort to enhance transparency and investor understanding of the asset class. But most investors do not pay attention to minuscule fluctuations of daily share values. Whether this initiative can fend off the call for tougher regulations remains to be seen.
3) FINRA Annual Regulatory and Examination Priorities Letter
FINRA | 1/11/2013
Because… ETFs, close-end funds, variable annuities, and structured products are among FINRA’s 2013 focus areas. With the guidance on what FINRA will be scrutinizing this year, asset management firms need to work with their distribution partners to identify potential problem areas and provide comprehensive education on complex products. Interests of distributors and product providers are intertwined. If a broker/dealer is targeted by FINRA, it will have a negative impact on product sales. So asset managers should assume the responsibility of helping their broker/dealers stay compliant.
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Total estimated outflows from long-term mutual funds were $6.4 billion for the week ended Wednesday, January 2, according to the Investment Company Institute (ICI). Fixed Income was the only broad asset class to garner sales. Taxable Bond gathered $2.9 billion while Municipal Bond managed to collect $291 million. On the other hand, investors pulled $8.3 billion from Domestic Equity, representing the largest redemption since the week ended October 3 with $10.6 billion in net outflows. World Stock shed $1.2 billion, and Hybrid funds suffered $152 million in net outflows. Outflows were experienced during the first week of 2012 ($5.4 billion) followed by 19 weeks of cumulative positive sales. Whether flows will follow the same trajectory this year remains to be seen.
Source: Investment Company Institute
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1) Freeman & Co. Reports that Slow Growth and Regulatory Environment Result in Mixed Year for Financial Services M&A Activity
Freeman & Co. | 1/2/2013
Because… The Freeman report points out that asset management was one of the most active sub-sector in terms of deal activity, and it anticipates that diversification of larger alternative firms through M&A will continue in 2013. From Virtus’ acquisition of Rampart Investment Management to OppenheimerFunds’ purchase of SteelPath, long-only asset managers are expanding their platform to capture new revenue opportunities. Acquiring alternative managers with attractive track records and reputation rather than building the capability internally has become a primary route for traditional asset managers.
2) Finra Fines LPL, Four Other Firms for Mutual Fund Lapses
Investment News | 1/2/2013
Because… Fund distributors are trying hard to improve the quality of their services, but occasionally they overlook some basic client needs. Fund prospectuses contain key information, such as a fund’s investment strategies and risks, so the requirement of timely delivery of prospectuses is in fact a means of providing investor protection. Firms should have adequate procedures in place to ensure prompt delivery and satisfy regulatory compliance when a potential delay is alerted by a third-party service provider.
3) "Fiscal Cliff" Tax Compromise Will Allow 401k Intra-Plan Roth Conversions
401khelpcenter.com | 1/72013
Because… The fiscal cliff deal includes a provision that allows Americans to convert their traditional 401(k) accounts into Roth accounts, but it is questionable whether the provision can raise $12 billion in 10 years as expected. First, people who expect their tax rates to be higher in the future will not be interested in the Roth conversion. Second, those who lack the money to pay the tax on the conversion cannot take advantage of the opportunity. Third, many employers have yet to provide a Roth plan option.
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Total estimated outflows from long-term mutual funds were $61 million for the week ended Wednesday, December 26, according to the Investment Company Institute (ICI). Cumulative outflows remained in the red throughout the month of December but tapered from approximately $4.6 billion and $6.6 billion in net outflows during the prior two weeks. Domestic Equity and Municipal Bond were the only broad objectives to experience redemptions with $3.6 billion and $685 million in net outflows, respectively. Taxable Bond led sales with $3.1 billion in net inflows, on par with the nearly $3.7 billion accumulated during the prior week. Representing a 26% increase from the prior week, World Equity gathered $363 million in net inflows. Finally, investors added $757 million into Hybrid funds after pulling $20 million during the prior week.
Source: Investment Company Institute
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Total estimated outflows from long-term mutual funds were $6.57 billion for the week ended Wednesday, December 12, according to the Investment Company Institute (ICI). Despite driving sales, Bond funds only gathered $1.8 billion during the week—its lowest intake since the week of July 3 when sales only reached approximately $1.4 billion. Meanwhile, Domestic Equity suffered $7.2 billion in net outflows while investors pulled $1.2 billion from World Equity funds. Hybrid funds managed to reverse its outflows from the prior week by collected $119 million in net inflows.
Source: Investment Company Institute
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1) RIAs and Fee-Based Advisors Say Tax-Deferred Investing Essential to Navigating Fiscal Cliff
PR Newswire | 12/13/2012
Because… As the year-end is quickly approaching, asset managers are busy addressing the fiscal cliff and its impact via economist commentary, blogs, white papers, webinars, and video clips. Vanguard, for example, has compiled all relevant content, including political perspectives and tax outlook, with a link prominently shown on its home page so that investors can easily gather insights from the firm. The efforts of educating investors on the subject and providing portfolio guidance need to be continued regardless of the outcome of the negotiation.
2) JPMorgan Wins Approval for First U.S. Physical Copper ETF
Bloomberg | 12/17/2012
Because… After waiting more than two years, JP Morgan finally got the support from the SEC to launch a physically-backed ETF. Copper manufacturers and merchants--worried about the manipulation of the copper market, imbalance between supply and demand, and inflated copper price--had opposed vehemently to JP Morgan’s plan. Now that the hurdle has been cleared, more ETF managers may follow suit to provide retail investors with direct access to copper in physical form, not in futures contracts.
3) SEI Unveils Resolutions For A Successful Advisor New Year
SEI | 12/17/2012
Because…. It’s that time of the year when investment firms offer their clients market outlooks and practice management advice for the next year. SEI’s resolutions, based on a recent survey of 275 financial advisors, are specific and actionable, setting a prime example for other firms. Besides the guideline, firms should also provide tools to motivate advisors and help them track their progress. Even with well-defined goals, resolutions can fail if they are not measurable.
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1) ICI Analysis of U.S. Retirement System: It Is Working and Serving Each Generation Better Than Previous
ICI | 12/5/2012
Because…The low level of retirement readiness among American individuals has prompted some people to question the validity of the entire system. Critics like Teresa Ghilarducci from the New School for Social Research even believe the government must step in and reform DC plans. The ICI analysis considered retirement resources as a pyramid with five components, as opposed to the traditional three-legged stool analogy, and concluded that the retirement system “has successfully provided adequate retirement resources to Americans, and successive generations of retirees have been better off than previous generations.”
2) Schwab Eyes Commission-Free ETF Supermarket
Reuters | 12/6/2012
Because… The decline of trading volumes, the hope for steady revenue, and the success of the OneSource platform for mutual funds have led Schwab to the pursuit of an ETF supermarket. But from ETF providers’ standpoint, the distribution and marketing fees of 5 to 10 basis points would cut into already razor-thin profit margins. ETF sponsors who may be interested in joining the network could be smaller firms that have the wherewithal to absorb additional costs, crave greater visibility, and do not offer products that compete directly with Schwab’s low-cost, proprietary ETFs.
3) SEC To Allow Derivatives In Active ETFs
IndexUniverse.com | 12/6/2012
Because… The SEC’s permission to use derivatives in actively managed ETFs is getting some ETF managers into the holiday spirit. While lifting the ban is not expected to quicken the pace of new fund launches, it does give portfolio managers more flexibility in investment strategy formulation and implementation. Investors will embrace funds that effectively use derivatives to provide downside protection and upside potential, but the complexity of derivatives suggests that adequate disclosure and enhanced education are indispensable.
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Total estimated inflows to long-term mutual funds were $4.09 billion for the week ended Wednesday, November 28, according to the Investment Company Institute (ICI). The last week of November ended on an upbeat note after suffering redemptions of $5.6 billion during the prior week. Investors pulled $496 million from Equity funds during the week, a dramatic improvement from $8.8 billion during the week of November 20th and $8.4 billion during the week of November 14th. Taxable Bond drove sales with $3.1 billion, while Municipal Bond gathered $1.3 billion. After experiencing two weeks of new outflows, Hybrid funds managed to gather $143 million in net inflows.
Source: Investment Company Institute
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1) Invesco PowerShares Lowers Fees on Six ETF Portfolios
Marketwire | 11/28/2012
Because… On the surface, PowerShares is joining other ETF providers in a price war, but unlike its competitors who focused the fee cuts on beta products, PowerShares slashed fees for fundamentally-weighted and factor-driven ETFs. These enhanced index ETFs do not have much head-to-head competition in the space. By reducing their fees to a level below 50 basis points, the firm is broadening their appeal to institutional investors, who are increasingly utilizing managed ETF portfolios.
2) Retiring Lawmaker Barney Frank Seeks SEC-CFTC Merger
Reuters | 11/29/2012
Because… Some people believe combining the SEC and the CFTC would streamline operations, avoid regulatory overlaps, bridge communication gaps, and provide better investor protection, while others hold the view that the merger of two long-standing agencies would not make any difference in preventing a failure similar to the collapse of MF Global from happening again. With more pressing issues on the table (such as the fiscal cliff) and an unwillingness to give up jurisdiction, the odds of consolidating two entities in the near future may be low.
3) EEM Leads Nov. ETF Flows, As VWO Lags
IndexUniverse.com | 12/3/2012
Because…Ever since Vanguard announced the index switch, its MSCI Emerging Markets ETF (VWO) has lost its popularity. VWO brought in only $1 million in October and experienced outflows of $887 million in November, compared with an average intake of more than $1.2 billion this year through September. By contrast, iShares Emerging Markets Index Fund, with an expense ratio of 0.67%, garnered $1.3 billion in October and $2.3 billion in November. The flow pattern of these two ETFs indicates the underlying index does play an important role in investors’ investment decisions.
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Despite a strong start to the year, Domestic Equity funds will once again sustain net outflows in 2012. We have been conducting a survey during the year, assessing client sentiment and your outlook coincides with actual net flows trends. More than half of the respondents indicated significant net outflows, while only four percent felt net sales would exceed $20 billion.
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By Gary Maradik, Managing Partner, Celera Systems LLC
1) Understand the landscape of asset management distribution
Making headway through the complex minefields of asset management industry data has to start with gaining a perspective on the landscape of asset management distribution.
2) Learn how the structural framework of clearing operates
Probably no industry structural framework confounds small and medium size asset managers more than the proliferation of clearing platforms and custodians through whom advisors and their dealers clear their transactions.
3) Aggregate transaction & clearing data
Getting a handle on how and through which clearing platforms an asset manager’s shares are being purchased and redeemed, and through which intermediaries, is not a task for the faint of heart. Systems infrastructure, both hardware and software is expensive, and sorting through the IT options and alternatives suitable for complex and time-sensitive data downloads is just the tip of the iceberg in terms of understanding where an asset manager’s business is coming from.
4) Crack the omnibus account “nightmare”
Omnibus sub accounting makes the puzzle of who’s recommending and redeeming a company’s fund shares or separate accounts, even more confounding.
For large asset managers, it’s not uncommon to have teams of operations, IT and back office personnel dedicated exclusively to sleuthing through mountains of data. For small and mid size asset managers, the ability to staff up with experienced operations and IT personnel is generally not an option; financially or otherwise.
5) Make sense of mountains of data
Information is power. Transforming data into databases and data-informed reporting and business iintelligence is the underpinning of crafting informed business strategy.
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1) SEC Chairman Mary Schapiro to Step Down Next Month
SEC | 11/26/2012
Because…With Ms. Schapiro’s departure, SEC commissioner Elisse Walter has been appointed as chairman of the agency. The SEC has faced intense criticism on some controversial issues, such as money market fund reform and rules to lift advertising restrictions for hedge funds. While we do not expect major changes in terms of the SEC’s agenda, restoring the public confidence needs to be one of the regulator’s top priorities.
2) Guardian Retirement Solutions New ‘Retirement Style Matters’ Website Gets Personal with Future Retirees
Guardian Life | 11/26/2012
Because… The four investor types Guardian has identified – the Connector, the Analyst, the Seeker, and the Adventurer – link the personality with financial behaviors, giving financial advisors and their clients a better idea of how to set financial goals and achieve these goals with appropriate planning. However, personality assessment can trigger people’s interest. Getting them to take immediate actions is more important in the retirement planning process.
3) F-Squared Investments Exceeds $300 Million in Liquid Alternative Strategies
PR Newswire | 11/27/2012
Because… F-Squared’s accomplishment of garnering more than $300 million in client assets in just over six months indicates investors who are seeking alternative strategies are placing increased emphasis on liquidity. While some insist illiquid investments can produce alpha in the long run, more investors seem to favor registered, liquid, transparent alternatives. To satisfy investor demand, a growing number of asset managers are using liquid instruments to replicate risk and return profiles of hedge strategies.
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1) Many Investors Expect Social Security to Be a Major Source of Retirement Income
Business Wire | 11/12/2012
Because… The Social Security Administration disclosed earlier this year that the average 2012 monthly Social Security benefits for a retired worker is just $1,229. According to the long-term projections by the Congressional Budget Office released last month, the Social Security trust funds would likely be exhausted in 2034. Both pieces of information point to the fact that individuals should not depend on Social Security income to cover their living expenses in retirement.
2) Eaton Vance to Launch the Bond Fund
SEC Filings | 11/13/2012
Because… The new Eaton Vance fund will be run by a team of portfolio managers led by Kathleen Gaffney, a highly regarded fixed-income manager from Loomis Sayles. The fund will have the flexibility to invest in multiple sectors across the fixed-income spectrum. We expect many advisors, investment consultants, and institutional investors to monitor the fund and follow Ms. Gaffney to Eaton Vance if the fund can build a solid three-year track record.
3) Target-Date Funds Are Growing in Popularity, Yet Few Consumers Understand Them
LIMRA | 11/14/2012
Because… The LIMRA study that found only 16% of investors were familiar with target-date funds (TDFs) reminds fund providers that TDF education still has a long way to go. The lack of the time, the knowledge, and the desire to make their own investment decisions gives plan participants excuses to put off learning about TDFs. Fund firms need to be more committed to engaging and educating plan participants so that they can have a better grasp of TDF features, benefits, and limitations.
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Total estimated inflows to long-term mutual funds were $6.24 billion for the week ended Wednesday, November 7, according to the Investment Company Institute (ICI). The first week of November proved to be quite the reversal from the last week of October when outflows totaled $571 million. Domestic Equity was the only broad asset class to experience redemptions with $2.1 billion in net outflows. As expected, Taxable Bond led sales with $6.4 billion, while Municipal Bond collected $1.1 billion. Investors put $553 million and $300 million into Hybrid and World Equity funds, respectively.
Source: Investment Company Institute
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1) PSCA Study Shows that Fee Disclosure Has Not Significantly Influenced Participant Behavior
PSCA | 11/8/2012
Because… The survey result that shows only 1.4% of plan participants asked about fees may surprise many in the industry who had expected a flood of questions from participants. For retirement plan service providers, participants’ inaction should not be construed as a positive feedback. Participants may not bother to read the disclosures. They may lack the knowledge to understand the fee impact on their investment. Or they may feel resigned to fees imposed on them.
2) Research Affiliates Withdraws Patent Infringement Lawsuit against WisdomTree
WisdomTree | 11/8/2012
Because… The news that Research Affiliates has dropped the lawsuit can finally give WisdomTree some peace of mind. WisdomTree, a publicly-traded ETF provider with the renowned professor Jeremy Siegel as its Senior Investment Strategy Advisor, is known for offering funds that track proprietary fundamentally-weighted indices. Now that the dispute has been resolved, the firm can allocate more financial and legal resources to the cause of boosting shareholder returns.
3) Investors Not Acting in Their Own Best Interest
Business Wire | 11/12/2012
Because… The State Street study entitled "The Influential Investor: How Investor Behavior is Redefining Performance," based on 12 months of research and input from more than 3,300 investment management industry participants, reveals a disconnect between investors’ decisions and their stated goals. In fact, many investor behaviors, such as their reluctance to take on risk due to recent experience and their inclination to favor immediate payoffs, can be linked to theories of behavioral finance. Asset managers that aim to deliver real value to investors must understand key drivers of investor behavior and help them overcome psychological barriers.
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Total estimated outflows from long-term mutual funds were $488 million for the week ended Wednesday, October 31, according to the Investment Company Institute (ICI). The estimated total intake is a dramatic turnabout from the nearly $5.5 billion in net inflows during the prior week. Fixed income was the only broad asset class to garner sales, with investors pouring $2.2 billion into Taxable Bond and $385 million into Municipal Bond. Following the overall trend, Domestic Equity let redemptions with nearly $1.9 billion in net outflows, while World Equity suffered $548 million. Despite gathering $1.3 billion during the prior week, Hybrid funds fell into the red, posting $672 million in net outflows.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $7.95 billion for the week ended Wednesday, October 17, according to the Investment Company Institute (ICI). Fixed income amassed nearly $8.7 billion in net inflows, despite being down 7% from last week’s total. Investors poured $7.6 billion in Taxable Bond, while Municipal Bond collected slightly less than $1.3 billion. Although equity funds remained in the red, outflows continue to taper from $2.6 billion last week to $1.7 billion. This is a dramatic improvement from the $11.2 billion in net outflows experienced during the first week of October. Domestic Equity accounted for $1.4 billion in net outflows, and World Equity shed $369 million. With $818 million in net inflows, Hybrid funds rebounded from $242 million during the prior week.
Source: Investment Company Institute
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1) Goldman Sachs to Liquidate Three Single Country Funds
SEC Filings | 10/18/2012
Because…Goldman Sachs, where the term “BRIC” (Brazil, Russia, India, and China) was coined, will soon put Brazil Equity Fund and India Equity Fund to rest. The short lifespan for each of these funds makes us ponder on the causes of their demise, which may include the lack of appeal of the largest emerging markets, investors’ preference for broad market-based funds, and their gravitation to lower-cost, better-performing products.
2) Credit Suisse to Sell European ETF Business
Reuters | 10/19/2012
Because… Just as U.S. investors are warming to ETFs, Credit Suisse is planning to unload its ETF business across the pond. European ETFs only accounted for 27% of U.S. ETF assets, but the European ETF industry has exhibited faster growth in the past decade than that in the U.S. In addition, the European market is more fragmented than in the U.S., with top players controlling fewer assets in Europe. The deal with Credit Suisse will offer a U.S. manager a great opportunity to expand their presence in the continent.
3) Despite Market Rally, Investors Turn to Absolute Return Funds
Reuters | 10/19/2012
Because… Asset managers may feel impelled to develop absolute return funds by headlines like this, but we caution firms to use discretion when introducing such funds to the retail market. This group of funds has not delivered consistent returns under different market conditions. Investors have not gained a solid understanding of various investment strategies employed by these funds. Higher fees due to frequent trading and the cost of shorting can eat into fund returns.
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Total estimated inflows to long-term mutual funds were $7.04 billion for the week ended Wednesday, October 10, according to the Investment Company Institute (ICI). This cumulative estimated total represents a dramatic uptick from last week’s total of $564 million. Fixed income generated $9.5 billion in net inflows, on par with last week’s total. As expected, Taxable Bond was responsible for 86% of the sales with inflows of $8.2 billion, while Municipal Bond collected $1.3 billion. Although stocks remained in the red, outflows tapered from $11.2 billion last week to $2.6 billion. Domestic Equity accounted for $2.3 billion in net outflows, and World Equity shed $295 million. Hybrid funds gathered $139 million in net inflows, down significantly from $2.3 billion during the prior week.
Source: Investment Company Institute
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1) Old Mutual Asset Management Strategically Focuses Portfolio to Align with Growth Plan
PR Newswire | 10/11/2012
Because… After selling its retail mutual fund business to Touchstone last October and stable value-focused Dwight Asset Management to Goldman Sachs in February, Old Mutual is divesting its affiliates again. By handing five affiliates over to their respective senior management teams, Old Mutual expects to ratchet up its operating margin. On the other hand, these boutiques--which specialize in absolute return strategies, managed futures, or quant strategies--could become acquisition targets again in the future for companies eager to add alternative capabilities.
2) iShares Reduces Expense Ratios for Six Funds
SEC Filings | 10/15/2012
Because… iShares finally disclosed funds with reduced fee rates. Besides the fee cuts, iShares announced yesterday the debut of four new ETFs that are part of a core series of 10 funds targeting buy-and-hold investors, the launch of a major branding campaign, and the integration of the iShares and BlackRock U.S. retail sales teams. These initiatives will enable iShares to keep up with the competition from low-cost providers, broaden its reach, and hopefully put a brake on its market share decline.
3) Vanguard Offers Low-Cost Inflation Hedge with Introduction of Short-Term TIPS Index Fund and ETF
Vanguard | 10/16/2012
Because… Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) is the firm’s first TIPS ETF. It will compete head-on with iShares Barclays 0-5 Year TIPS Bond, PIMCO 1-5 Year U.S. TIPS Index ETF, and FlexShares iBoxx 3-Year Target Duration TIPS Index ETF. These ETFs had assets of $392 million, $1 billion, and $670 million, respectively, as of 10/15, but VTIP has a good chance of raising more assets with an expense ratio of 0.10%, half of the fees charged by the three existing ETFs. VTIP’s use of the same benchmark as the iShares ETF will also give Vanguard an advantage in attracting flows.
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Total estimated inflows to long-term mutual funds were $2.05 billion for the week ended Wednesday, October 3, according to the Investment Company Institute (ICI). Fixed income garnered a record $10.9 billion during the week, surpassing its $10.7 billion intake during the week ended March 7, 2012. Taxable Bond gathered the lion’s share with $8.1 billion, while Municipal Bond collected $2.8 billion. Equity funds reached a record low for 2012 with nearly $11.1 billion in net outflows. Investors pulled $10.6 billion from Domestic Equity and $483 million from World Equity. Hybrid funds rebounded from $386 million in net outflows last week by capturing nearly $2.3 billion in net inflows this week.
Source: Investment Company Institute
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1) Retirement Plan Types of Fortune 100 Companies in 2012
Towers Watson | 10/4/2012
Because… The shift away from defined benefit (DB) plans has been widely publicized and is evident in the Towers Watson research. The switch to defined contribution (DC) plans, along with the fact that many private-sector employees are not covered by DB plans, has forced American people to rely more on personal savings options. Thus, incorporating DB-like benefits, such as income replacement, into DC plans is becoming more of a necessity than a wish for plan sponsors and participants.
2) Exchange-Traded Funds (ETFs) Are Here to Stay, Investors Tell Schwab
Business Wire | 10/4/2012
Because… The Schwab survey shows that a lot of people still consider themselves ETF novices, despite the seemingly ubiquity of this investment vehicle. With new products continuously brought to the market and more asset managers trying to capitalize on the fast growth of the ETF industry, investor education should be placed at the top of each provider’s agenda. Firms dedicated to educational efforts can move beyond product differentiation and create investor loyalty.
3) Aberdeen Introduces Three New Multi-Asset Funds
PR Newswire | 10/8/2012
Because… Multi-asset funds are becoming increasingly popular, as investors search for greater diversification and hedge against various risks. Unlike balanced funds with 60/40 stock/bond allocation, this group of funds provides exposure to a broader set of asset classes so that risks are spread out and reduced. The three fund-of-funds offerings from Aberdeen are interesting since they feature a blend of traditional and non-traditional asset classes, active and passive approaches, and proprietary and non-proprietary underlying funds.
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Total estimated inflows to long-term mutual funds were $448 million for the week ended Wednesday, September 26, according to the Investment Company Institute (ICI). Fixed income was the only broad asset class to garner sales during the week. Taxable bond collected nearly $6.9 billion, while Municipal bond posted net inflows of $1.4 billion. On the other hand, investors pulled $5.1 billion from Domestic Equity and $2.4 billion from World Equity. This represents the largest weekly outflow from stocks since the first week of January 2012. The positive momentum that Hybrid funds have experienced since June 6 came to a halt this week with $377 million in net outflows.
Source: Investment Company Institute
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1) Invesco to Acquire 49 Percent of Religare Asset Management
Invesco | 9/27/2012
Because… Owning the stake in the fast-growing Religare will enable Invesco to gain a foothold in the Indian fund industry, which has benefited from the country’s buoyant economy, increasingly active capital markets, rising personal wealth, and competition from foreign players. Meanwhile, challenges are abound, including a sluggish stock market, the ban on the entry load, and the lack of investor enthusiasm for mutual funds. How to maintain the economic viability amid the changing regulatory environment will be a tough issue for the new joint venture to tackle.
2) Pioneer to Unveil the Emerging Markets Local Currency Debt Fund
SEC Filings | 9/28/2012
Because… Unlike years ago when investors were wary of the exposure to emerging market currencies, emerging markets local currency-denominated debt has become an asset class with which more investors feel comfortable. Emerging markets debt has the potential to exhibit stronger growth if the economic crisis in developed markets continues in the next few years. However, the heightened interest in this emerging asset class does not mean that the embedded risks of emerging market bonds no longer exist.
3) Vanguard Wins Most Deposits Ever on Indexing Popularity
Bloomberg | 10/1/2012
Because… The fact that Vanguard attracted more money in the first nine months of 2012 than it has in any full calendar year in its 38-year history once again underlines the appeal of low-cost investing. Keeping costs low has been in the firm’s DNA. With its unique ownership structure, Vanguard is able to reduce expense ratios and pass the savings on to investors. Changing to benchmarks with lower license fees is the firm’s latest endeavor to cut fund costs.
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Total estimated inflows to long-term mutual funds were $4.47 billion for the week ended Wednesday, September 19, according to the Investment Company Institute (ICI). This total intake represents a 28% decrease from cumulative sales during the previous week. Taxable Bond gathered nearly $7.6 billion in net inflows, while Municipal Bond only managed to collect $446 million. Domestic Equity experienced an 80% decrease from the prior week with $4.8 billion in net outflows. World Equity also remained in the red for the ninth consecutive week with $355 million in net outflows. Hybrid funds, which have not experienced outflows since the week ended June 6, collected $1.6 billion in net inflows, which represents a 25% increase from the prior week.
Source: Investment Company Institute
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1) Schwab Reduces ETF Fees
SEC Filings | 9/20/2012
Because… Schwab’s move makes its low-cost ETFs even cheaper. The firm boasts that its ETFs now “have the lowest expense ratios in their respective Lipper categories.” The commission-free trading for its clients and a powerful distribution platform have also contributed to the rapid growth of Schwab’s ETF business. Schwab’s fee cuts are turning up the heat on BlackRock, which announced its own plan to slash fees just 10 days ago. Ultimately, investors will be the primary beneficiary of the price competition.
2) Research Funds Aren't All They're Cracked Up to Be
Morningstar | 9/24/2012
Because… Research funds epitomize collective wisdom since a group of stock-pickers call the shots. By giving analysts more clout, these funds are less likely to be influenced by a couple of portfolio managers’ personal biases. Analyst-driven funds have had their ups and downs over the past years, so they are neither a winning formula nor a recipe for disaster. This particular approach should not be the sole selling point of a fund. Fund firms with such offerings should concentrate more on entire investment process, analyst accountability, and performance appraisal system in fund marketing and distribution.
3) Morgan Stanley Smith Barney is Now Morgan Stanley Wealth Management
Morgan Stanley | 9/25/2012
Because… Morgan Stanley started floating names to replace “Smith Barney” more than a year ago. Many firms, such as Dean Witter and Wachovia on the brokerage side and Scudder and Evergreen on the asset manager side, lost their identity after being acquired, and this news of one of the most recognized names finally being scrapped is still hard to digest for quite a few in the industry.
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Total estimated inflows to long-term mutual funds were $6.12 billion for the week ended Wednesday, September 12, according to the Investment Company Institute (ICI). This total intake represents nearly double the $3.10 in sales during the prior week. Taxable Bond continues to drive sales with approximately $6.8 billion in net inflows. Municipal Bond’s intake was $1.3 billion, bringing fixed income’s total to $8.1 billion—the highest net flows since its $9.7 billion total during the week ended April 4. Domestic Equity shed nearly $2.8 billion, while World Equity shed $548 million, a significant drop from the $225 million in net outflows suffered a week earlier. With a 43% increase from the prior week, Hybrid funds gathered $1.3 billion in sales this week.
Source: Investment Company Institute
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1) State Street Global Advisors Launches MLP Strategy for Institutional Investors
Business Wire | 9/13/2012
Because… The unique partnership structure makes MLPs attractive since there is no income tax at the corporate level and MLPs generally offer dividend yields and cash distributions that are significantly higher than taxable income passed on to investors. MLPs are mostly held by private client wealth managers who understand the structure and tax complexity. Now that institutional investors are starting to employ this strategy, we expect more MLPs to be rolled out due to the low interest rate environment and investor pursuit of consistent income.
2) Janus Fixed Income Team Adds Investment Staff to Support Continued Growth
Janus | 9/17/2012
Because… Fixed income has been the only bright spot at Janus this year with net outflows of $2.2 billion from Domestic Stock and $1.4 billion from International Stock in the first two quarters. Expanding fixed-income capabilities may more effectively position Janus to seize opportunities in the bond arena. However, for an equity-oriented firm with just 12% of retail assets in fixed-income funds, enhanced fixed-income offerings would not be enough to move its sales out of the negative territory should performance and redemption issues persist on the equity side.
3) High-flying S&P 500 Actually Down Last Three Years? Investors Think So
Investment News | 9/18/2012
Because… Investor fear has been a key factor for their disbelief in the stock market. Consistently high unemployment rates, the fiscal cliff worries in the U.S., the ongoing sovereign debt crisis in Europe, slower growth in emerging markets, and political leadership changes around the world have only elevated their concerns about equity investing. For asset managers, education about historical post-crisis stock performance, the need for asset diversification, and improved risk control systems may help investors allay their fears.
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Total estimated inflows to long-term mutual funds were $3.11 billion for the week ended Wednesday, September 5, according to the Investment Company Institute (ICI). Sales during the first week of September continue to follow the same general pattern with all broad asset classes gathering inflows with the exception of stocks. Domestic Equity shed nearly $2.9 billion in outflows, while World Equity only experienced $225 million in net outflows. Taxable Bond drove sales with nearly $4.5 billion in net inflows, down from its intake of $5.4 billion during the prior week. With $794 million in net inflows, Municipal Bond experienced a 20% drop from its total during the prior week. On the other hand, Hybrid funds garnered $910 million, managing a 5% increase from the prior week.
Source: Investment Company Institute
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1) BlackRock to Lower Fees on Some ETFs to Better Compete
Reuters | 9/10/2012
Because… iShares has been sticking to its strategy of focusing more on client services and education instead of lowering fees, but the rising price competition has helped other ETF providers stealthily take away its market share. iShares’ market share has fallen to about 40% from about 60% five years ago. The effectiveness of iShares’ price cut will be determined by price disparities of its products relative to its peers as well as the total value it provides to investors.
2) Legg Mason Implements CEO Succession Plan
Legg Mason | 9/11/2012
Because… Mark Fetting has been under fire as the firm is struggling with lagging stock price, fund performance dips, and investor withdrawals. The firm has made some turnaround efforts, such as shaking up management ranks, streamlining its product line, replacing star stockpicker Bill Miller after his market-beating streak ended, venturing into alternatives, filing for ETFs, and pursuing overseas opportunities. However, these initiatives have yet to deliver solid results. The industry will keep an eye on who will head Legg Mason after Mark Fetting steps down.
3) U.S. District Court Dismisses Class Action Lawsuit against ProShares
ProShares | 9/11/2012
Because… The dismissal of the class action suit handed ProShares a huge victory. The fact that the court sided with the firm in this case gives leveraged ETF providers much-needed peace. Leveraged ETFs have been generating a lot of negative publicity, controversy, and regulatory scrutiny over the past few years. To educate investors, leveraged ETF managers should continue to make sure their marketing messages are clear, comprehensive, and consistent. Also, they should allocate dedicated resources to clarify investor misconception and debunk myths surrounding their products.
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Total estimated inflows to long-term mutual funds were $2.99 billion for the week ended Wednesday, August 29, according to the Investment Company Institute (ICI). The total intake represents an 11% decrease from the prior week’s sales total. Once again, all broad asset classes experienced inflows with the exception equity funds. Domestic Equity shed $3.7 billion, while its World counterpart experienced $724 million in net outflows—an improvement compared to outflows of $4.5 billion and $1.4 billion, respectively, during the prior week. Taxable Bond gathered $5.6 billion in net inflows, slightly down from its $5.9 billion in sales during the prior week. Municipal Bond experienced an uptick in sales from the prior week with $993 million, representing an 8% increase. Despite gathering $866 million in net inflows, Hybrid funds faced the greatest decrease in sales from the prior week—64%.
Source: Investment Company Institute
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1) Fidelity Investments Names Abigail P. Johnson President of Fidelity Financial Services
Fidelity | 8/28/2012
Because… There has been much speculation about who will succeed Ned Johnson to run the financial services powerhouse. The promotion signals Abigail Johnson could take over the top job when her father steps down. Her exposure to various businesses within the organization is definitely a plus, but challenges that come with leading such a complex company will be daunting, including regaining lost market share, improving lackluster fund performance, and fighting the trend toward passively managed ETFs.
2) Significant Number of Boomers and Gen-Xers Falling Behind in March toward Secure Retirement
The Insured Retirement Institute | 8/28/2012
Because…The finding that shows “significant portions of these demographic groups have insufficient savings, lack investment knowledge, and have not taken important retirement planning steps” is disturbing. Reasons for the grim situation include unawareness of how much they will need for retirement, perception that financial assistance may eventually cover living expenses after retirement, and anticipation of postponing retirement to maintain their standard of living. The problem of insufficient savings urges financial services companies to step up to the plate and seize every opportunity to educate people and help them develop a sense of urgency.
3) Cetera Financial Group Unveils New Brand Structure
Cetera Financial Group | 9/4/2012
Because… A unified brand may help a firm boost name recognition in the marketplace. Cetera, which was formed in 2010, is considered a fairly nascent brand, although it already provides services for more than 6,500 independent financial professionals and more than 600 financial institutions nationwide. While the rebranding effort is aimed at promoting collaboration, consistency, and alignment among its four separate affiliates, maintaining each firm’s independence is vital to retaining advisors and growing business.
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Total estimated inflows to long-term mutual funds were $3.37 billion for the week ended Wednesday, August 22, according to the Investment Company Institute (ICI). All broad asset classes experienced inflows with the exception equity funds. Domestic equity shed nearly $4.5 billion, while its World counterpart experienced $1.4 billion in net outflows. Taxable Bond gathered $5.9 billion in net inflows, on par with the near $6.0 billion gathered during the prior week. With $921 million in net inflows, Municipal Bond suffered a 42% decrease from its intake during the prior week. On the other hand, Hybrid funds gathered $2.4 billion, a dramatic increase from its $953 million in net inflows captured during the prior week.
Source: Investment Company Institute
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1) Legg Mason Plans Index ETFs Too
IndexUniverse.com | 8/22/2012
Because… After being hit by 18 consecutive quarters of net outflows, Legg Mason finally posted positive flows in the first two quarters of this year. However, attracting investor interest in the index ETF market will be a tough task for the firm. The fact that the dominance of leading players, namely iShares, SSgA, and Vanguard, has driven newcomers out of business (most recently FocusShares and Russell) reflects the highly competitive nature of the ETF industry.
2) Schapiro Raises the White Flag on Money Funds
Investment News | 8/23/2012
Because… The industry had waged a fierce lobbying campaign against Ms. Schapiro’s proposal. The SEC chair’s decision to call off the vote for money market fund reform may seem to be a victory for money fund providers, but whether they can breathe a big sigh of relief remains in question. Regulators may still push for changes as they deem the sector vulnerable and needing greater oversight.
3) Young Americans Start Saving for Retirement 10 Years Earlier than Parents, Grandparents
TD Ameritrade | 8/28/2012
Because… The TD Ameritrade survey put an emphasis on Gen Z (those between the ages of 13 and 22). This younger generation understands the importance of saving, but there appears to be disconnections between what they believe and what they practice. A much higher percentage of this cohort counts on Social Security and inheritances more heavily than their parents. Figuring out how to provide unbiased education and practical advice that can help them set realistic financial expectations and alleviate their financial concerns will be a challenge faced by many firms.
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1) Columbia Files to Offer 15 More ETFs
IndexUniverse.com | 8/17/2012
Because… Columbia is expanding its ETF product line just as Russell announced the liquidation of all passively managed ETFs to shift its focus to actively managed ETFs. Both firms are setting sights on the active ETF space, which shows the growth potential of active ETFs. But will they become successful with new strategies? Columbia’s five active ETFs have remained small ($25 million as of end June) since the firm acquired them from Grail Advisors a year ago. Russell Equity ETF, the firm’s lone survivor with an active asset allocation approach, held only $4 million.
2) HighTower Accelerates Chicago Expansion with $1 Billion Credit Suisse Team
HighTower | 8/20/2012
Because… HighTower has brought on 33 teams since its inception in 2008, becoming one of the fastest-growing firms in the wealth advisory world. Its hybrid model has attracted the attention of quite a few high-profile advisors due to growing dissatisfaction among wirehouse advisors, the equity stake in the company, an open architecture that provides access to multiple custodians and clearing firms, top-notch support services, and the offering of independent investment advice.
3) Carlyle Likely to Do More Money Manager Deals
Pensions & Investments | 8/20/2012
Because… Private equity firms are actively looking for deals in the asset management sector. Smaller, well-managed asset managers that generate steady revenues are more likely to become the next targets for acquisitions. The ownership by private equity firms enables investment managers to focus more on the long-term, unlike public firms that need to respond constantly to market pressure. Private equity investors also tend to increase the management ownership to retain and motivate key employees.
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Total estimated inflows to long-term mutual funds were $4.29 billion for the week ended Wednesday, August 8, according to the Investment Company Institute (ICI). The nearly $5.7 billion in sales from Taxable Bond was able to compensate for equity outflows. Domestic Equity suffered nearly $3.6 billion in net outflows compared to $5.7 billion in redemptions during the prior week. World Equity shed $122 million, which was a solid improvement from the $1.2 billion in outflows during the prior week. Municipal Bond gathered nearly $1.5 billion in net inflows, representing a 32% increase from its intake during the prior week. With $800 million in net inflows, Hybrid funds also fared well, representing a 27% increase from its prior week total.
Source: Investment Company Institute
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1) FocusShares Trust’s Board of Trustees Votes to Close Exchange Traded Funds
Business Wire | 8/6/2012
Because… Lessons should be learned from FocusShares’ second failed attempt. First, competing on price for commoditized products may not be as effective for smaller firms as for more established household names. Second, narrowly focused sector funds may face more challenges in asset-gathering than broad market-based funds due to relatively higher risks and volatility. Third, sufficient marketing and distribution support is a requisite if the brand is not PIMCO.
2) Invesco Balanced-Risk Allocation Fund Earns Top Morningstar Rating of 5 Stars
PR Newswire | 8/6/2012
Because…The fund raked in $3.5 billion in the first half of the year after garnering $2.3 billion in 2011. With 1-year and 3-year returns ranking in the top 1% and 4%, respectively, the 5-star fund is expected to maintain the sales momentum for the rest of the year. We believe the fund’s popularity results from a combination of its outperformance and Invesco’s distribution prowess. Moreover, it reflects investors’ strong need for solutions that can de-risk their portfolios.
3) Janus Capital Group Inc. Announces Strategic Alliance with The Dai-ichi Life Insurance Company, Limited
Business Wire | 8/9/2012
Because… We do not expect the investment from Japan’s second-largest life insurer to reverse Janus’ 12 quarters of redemptions in the near term, but the deal will benefit Janus on several fronts in the long run. Dai-ichi Life will invest USD$2 billion of its general account assets with Janus, sell Janus products in Japan through a joint venture between Dai-ichi and Mizuho Financial Group, and provide seed capital for Janus to diversify its product line. Such efforts as expanding overseas and building up its fixed-income business will ultimately make Janus a stronger company.
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Total estimated outflows from long-term mutual funds were $1.19 billion for the week ended Wednesday, August 1, according to the Investment Company Institute (ICI). This represents the fifth week during 2012 that overall long-term mutual fund flows fell into the red. For the week, outflows were led by redemptions in equity funds, with Domestic Equity shedding nearly $5.7 billion and World Equity experiencing $1.2 billion in net outflows. Taxable Bond funds gathered $3.9 billion followed by $1.1 billion in net inflows from Municipal Bond funds. Hybrid funds garnered $630 million in net inflows, representing a 15% decrease from its intake during the prior week.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $3.81 billion for the week ended Wednesday, July 25, according to the Investment Company Institute (ICI). This estimated total is a sharp decrease from the $8.0 billion and $7.6 billion intakes during the prior two weeks, respectively. After posting net inflows during the prior week, both Domestic and World Equity suffered outflows of $2.1 billion and $568 million, respectively. Taxable Bond continues to lead sales with nearly $4.3 billion in net inflows, representing 16% decrease from the prior week’s intake. On the other hand, Municipal Bond gathered $1.5 billion—a 9% increase from its total during the prior week. Despite a 19% decrease from the prior week, Hybrid funds garnered $737 million.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $8.01 billion for the week ended Wednesday, July 18, according to the Investment Company Institute (ICI). This total represents a significant turnabout from the $380 million in outflows suffered during the opening week of July. For the first time since February 15, all major objectives experienced inflows. Domestic Equity managed to gather $99 million in inflows, while World Equity collected $542 million in inflows. Despite suffering a 48% decrease from its intake during the prior week, Hybrid funds garnered a solid $905 million. Investors poured $5.1 billion into Taxable Bond and another $1.3 billion into Municipal Bond funds. The cumulative total for fixed income represents its highest intake since May 16, 2012.
Source: Investment Company Institute
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1) S&P Dow Jones Indices Launches S&P Target Date Style Index Series
PR Newswire | 7/19/2012
Because… S&P’s new target-date indices provide separate performance comparisons for "to" versus "through" glide paths. Since target-date providers employ different glide path designs and asset allocation models, selecting an appropriate benchmark to evaluate the fund performance is challenging for many plan sponsors and advisors. With the availability of separate index series, fund providers can offer their investors a better yardstick to measure the value they add.
2) SEC Extends Review Period on JPM's Copper ETF Plan
Reuters | 7/19/2012
Because… The SEC’s decision to extend the review period shows the level of scrutiny commodity ETFs are receiving currently. Investors are reviving their interest in commodity exchange-traded products, as evidenced by net inflows of $3.2 billion in the first half of the year, compared with a mere $472 million in the entire year of 2011. However, for asset managers that look to roll out commodity ETFs, especially physically backed funds, persuading regulators that these new introductions will not disrupt the global supply is essential.
3) KKR Plans to Offer Two Retail Funds to Pursue Debt Deals
Bloomberg | 7/19/2012
Because… The private equity giant is going retail with the launch of two debt funds. Like hedge fund managers, private equity firms are stepping into the retail fund market to diversify their business operations. Shrinking fee income and more difficult market conditions are driving private equity firms to seek new revenue opportunities. While KKR may leverage its brand in the retail space, it may lack experience and established relationships in retail distribution.
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FUSE Research Network and SwanDog Strategic Marketing are excited to announce that they have concluded the research and analysis phase for the 2012 version of their comprehensive marketing benchmark study of the asset management industry. The study is slated for release in August 2012.
Since social media is a hot-button topic among asset managers, the research report has placed emphasis on the subject. Overall, 58% of the respondent firms participate in social media in some capacity, which is up nearly 240% from the research FUSE and SwanDog conducted in 2011.
For the entire release, click here
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1) Vanguard Weighs Push into Banking
Reuters | 7/12/2012
Because… With yields of money market funds hitting an extremely low level and the SEC pushing for money market reform, mutual fund firms see the need to consider other business options to retain investors. Firms like Fidelity, Schwab, and TIAA-CREF have already offered banking services. Vanguard has provided some cash management services through a partnership with PNC. If Vanguard expands banking offerings, its scale and reputation for low costs, as well as the convenience of asset transfer, may encourage investors to stay with the firm.
2) FlexShares ETFs Top $1B in AUM
Benzinga | 7/12/2012
Because…With only four ETFs in the lineup, garnering $1 billion within a year is quite impressive. To ensure that history does not repeat itself, Northern Trust put a new team in place and more importantly, it developed a product strategy that is different from its first attempt. The inclusion of two TIPS funds, a natural resources fund, and an enhanced beta fund shows that focused, innovative products that provide unique portfolio solutions can be very appealing to retail and institutional investors.
3) OppenheimerFunds to Acquire SteelPath, a Leading Edge MLP Investment Manager
PR Newswire | 7/17/2012
Because… OppenheimerFunds is the latest firm that strengthens its alternative investment capabilities via an acquisition. We expect M&A activities in the alternatives space to continue to increase as a result of the growing demand for alternative investments and the need for fund firms to search more growth opportunities. In this case, the addition of SteelPath, known for its MLP funds, will give OppenheimerFunds' clients immediate access to the energy infrastructure sector.
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Total estimated inflows to long-term mutual funds were $1.68 billion for the period of June 28 through July 3, according to the Investment Company Institute (ICI). For the fourth consecutive week (less one trading day on July 4), all major objectives experienced inflows with the exception of Domestic Equity’s nearly $3.1 billion in outflows. This represents slightly more than double its $1.5 billion shed during the prior week. All other major objectives, with the exception of Hybrid funds, experienced decreased sales from the prior week. Despite leading sales, Taxable Bond garnered $2.5 billion in inflows, representing a 23% decrease from its $3.2 billion total during the prior week. With a 19% decrease, Municipal Bond gathered $870 million in net inflows. World Equity experienced a 17% decrease and only managed to collect $300 million in net inflows. Conversely, Hybrid funds experienced a significant increase from its mere $18 million in inflows during the prior week and garnered slightly more than $1.1 billion in net inflows.
Source: Investment Company Institute
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1) Pimco Hires Three as Bridwell's Alternatives Unit Grows
Bloomberg | 6/27/2012
Because… Firms like PIMCO are adding dedicated resources to expand their product development and distribution efforts in the alternative investments space. These teams have their work cut out for them as the trend toward alternatives has become more pronounced than ever and alternatives are playing an increasingly important role in asset allocation. Besides evaluating opportunities that can add value in different market environments, alternative teams also need to identify target markets and carve out effective market targeting strategies.
2) UBS Pushes Further into ETFs with London-listed Range
Reuters | 6/28/2012
Because…The listing of 64 ETFs, the largest single-day ETF launch in the London Stock Exchange’s history, shows UBS’ determination to become a bigger player in the European ETF market. Europe, with $273 billion in assets as of the end of June, has become a battlefield for ETF providers. The UK Financial Services Authority's commission ban for independent financial advisors and the European Union’s proposal for required reporting of all ETF trades will make ETFs a more attractive investment vehicle in Europe.
3) Goldman Plans to Liquidate Target Date Strategies
SEC Filings | 7/2/2012
Because… Goldman Sachs is joining Columbia and Oppenheimer in the closure of target-date funds. Target-date fund assets reached $406 billion as of the end of May, but about 75% of assets are held by Fidelity, Vanguard, and T. Rowe Price. Defined Contribution Investment-Only (DCIO) managers often find it tough to compete with firms with a proprietary recordkeeping platform. Only those with a sound glide path strategy, an appropriate asset class mix, strong performing underlying funds, and lower expense ratios will survive the competition.
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Total estimated inflows to long-term mutual funds were $3.26 billion for the week ended Wednesday, June 27, according to the Investment Company Institute (ICI). For the third consecutive week, all major objectives experienced inflows with the exception of the nearly $1.5 billion in outflows shed from Domestic Equity. Once again, World Equity only managed to capture $362 million (versus $327 million during the prior week), bringing equity’s overall total to nearly $1.1 billion in net outflows. Despite a 19% decrease from its intake during the prior week, Taxable Bond led sales with nearly $3.3 billion in net inflows. On the other hand, Municipal Bond experienced a 25% increase from the prior week, collecting nearly $1.1 billion in estimated inflows. Hybrid funds managed to stay in the black for its third consecutive week but only gathered $21 million in net inflows.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $4.56 billion for the week ended Wednesday, June 20, according to the Investment Company Institute (ICI). Once again, all major objectives experienced inflows with the exception of the $1.8 billion in outflows shed from Domestic Equity. World Equity only managed to capture $327 million, bringing equity’s overall total to $1.5 billion in net outflows. Taxable Bond led sales with $4.0 billion in net inflows, representing a 39% increase from its intake during the prior week. With a 42% increase from the prior week, Municipal Bond collected $860 million in estimated inflows. Hybrid funds experienced its second consecutive week of inflows with nearly $1.2 billion in net inflows—its highest intake since April 18, 2012.
Source: Investment Company Institute
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1) AllianceBernstein L.P. Extends Employment Contract of Chairman & CEO Peter S. Kraus for an Additional Five Years
PR Newswire | 6/21/2012
Because… Ongoing net redemptions and lackluster performance have many in the industry questioning Mr. Kraus’ turnaround efforts. The extension of his contract indicates the board still has much confidence in him and believes in his vision and execution. The firm announced organizational changes last December that streamlined its management structure, aiming to “improve the execution of its long-term strategy of diversifying the mix of investment services it offers to clients, and increasing operating leverage.” We hope the board’s patience and trust will pay off.
2) Columbia Management Launches Risk Allocation Fund
Columbia Management | 6/21/2012
Because… We are seeing asset management firms pay more attention to the concept of risk allocation. A couple of asset managers have reaped the benefit of introducing such funds to the marketplace. By spreading portfolio risk equally across asset classes and levering up lower-risk assets, this type of fund has the potential of producing greater risk-adjusted returns. While these portfolios generally perform better during times of economic weakness, they may underperform during boom times.
3) MSSB Advisers Get Green Light for Social Media
Investment News | 6/25/2012
Because… By extending its pilot program that gave 600 advisors access to social media tools to the rest of its advisors, MSSB must have seen some promising results. The key to social media adoption is to develop a defined and thoughtful strategy and well laid-out plans to implement the strategy. Some challenges firms face may include: converting skeptical advisors into social media advocates, managing information flow, tracking data inputs on multiple platforms, and measuring return on investment.
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Total estimated inflows to long-term mutual funds were $5.46 billion for the week ended Wednesday, June 13, according to the Investment Company Institute (ICI). This marks a significant turnabout from the $1.55 billion in net outflows during the prior week. All major objectives experienced inflows with the exception of the $620 million in outflows shed from Domestic Equity. Despite these outflows, World Equity garnered $1.5 billion and managed to pull overall Equity into the black with $891 million in net inflows. Taxable Bond drove sales with nearly $3.0 billion in net inflows, an impressive uptick from the $408 million gathered during the prior week. Municipal Bond collected $604 million, a 49% decrease from its $1.2 billion intake during the prior week. Hybrid funds rebounded by gathering $966 million from $1.2 billion in net inflows during the prior week.
Source: Investment Company Institute
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1) AllianceBernstein Casts Doubt on Explosive ETF Growth
Reuters | 6/13/2012
Because… AllianceBernstein’s forecast seems to be throwing a wet blanket on ETF providers. Meanwhile, a P&I survey shows worldwide ETF assets grow at a slower rate in 2011. However, we still see ample opportunities for the industry to expand. With retail investors getting more educated about advantages of ETFs, advisors shifting their focus to client services from investment management, institutional investors increasing allocation to ETFs for various purposes, and large asset managers entering the fray, the industry will likely maintain its momentum in the near future.
2) American Funds to Allow Other Fund Firms On Its K Platform
The Mutual Fund Wire | 6/14/2012
Because… We believe the trend toward open architecture is taking shape as a result of advisor demand and regulatory pressure. With the need for best-in-class managers rising, it is more advantageous for a firm to retain clients by offering them more choices as opposed to seeing them leave for its competitors. Regulators may also push the use of non-proprietary funds, as the conflict-of-interest issue that comes with proprietary funds is increasingly being put under the legislative microscope.
3) Nationwide Introduces Simplified, No-Load Variable Annuity for Fee-Based Advisors at Wells Fargo
Nationwide | 6/14/2012
Because… An increasing number of firms are rolling out variable annuity options for fee-based advisors. While variable annuities are getting a fresh look amid growing concerns about insufficient retirement savings, the annuity industry has been associated with high costs, complex product structure, and a bad reputation which resulted from deceptive sales practices. If financial firms’ latest efforts can change investors’ views and win them over to VAs, it will be a turning point for the VA industry.
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Total estimated outflows from long-term mutual funds were $1.37 billion for the week ended Wednesday, June 6, according to the Investment Company Institute (ICI). This represents the second time this month and the third time this year that overall sales fell into negative territory. Domestic equity shifted from leading sales during the prior week to once again driving outflows, with nearly $3.1 billion in outflows. On the other hand, its World counterpart led sales this week by gathering nearly $1.4 billion. Municipal Bonds garnered nearly $1.2 billion, while Taxable Bond only managed to collect $411 million after suffering $816 million in outflows during the prior week. Hybrid funds fell into the red once again with $1.2 billion in net outflows.
Source: Investment Company Institute
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1) Plan Sponsors and Recordkeepers Agree That Retirement Income Will Be “The Biggest Trend” Over Next Five Years
Business Wire | 6/5/2012
Because… The MetLife study puts retirement income into the limelight. Many plan sponsors still focus more on asset accumulation than retirement income. Even though some have become aware of the importance of ensuring that their plan participants have adequate income, they have not been fully engaged in the effort. Plan sponsors’ reluctance to integrate retirement income options into their plans is mostly caused by their concern about fiduciary liability in selecting appropriate retirement income solutions and assessing product providers’ ability to offer steady income payments.
2) PIMCO Files for Three Fixed-Income ETFs
SEC Filings | 6/7/2012
Because… PIMCO is executing a market positioning strategy that has been working really well for the bond giant. By putting three existing mutual funds into an ETF wrapper, the firm will grow its roster of actively managed ETFs to nine. With its disciplined investment approach, rigorous investment process, and demonstrated management skills, PIMCO is sure to be a dominant player in the active ETF space.
3) Will More Retirement Plans Shift to ETFs?
Financial Planning | 6/8/2012
Because… While the report of Apple moving to an all ETF 401(k) plan may not be true (see “AAPL’s All-ETF 401(k) Plan? Not!”), low-cost ETFs can be a viable solution inside a retirement plan. Technology is no longer an obstacle for ETFs to make headway into 401(k) plans. The fee-cutting frenzy, regulatory requirement of fee disclosure, enhanced portfolio transparency compared to other investment vehicles, and distribution efforts on the part of ETF providers will help ETFs garner more attention from plan sponsors.
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Total estimated inflows from long-term mutual funds were $1.63 billion for the week ended Wednesday, May 30, according to the Investment Company Institute (ICI). This estimated total puts flows back into positive territory after suffering nearly $4.90 in outflows last week. In quite the reversal, Equity funds gathered nearly $1.5 billion in net inflows, while Bond funds experienced outflows of $317 million. Outflows were a result of the $920 million shed from Taxable Bond which has not experienced outflows since early October 2011. Meanwhile, Municipal Bond gathered $603 million. Domestic Equity drove sales with $807 million in net inflows followed by World Equity’s $678 million in net inflows. Hybrid funds reversed its outflows from the prior week by gathering $460 million in net inflows.
Source: Investment Company Institute
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1) Average IRA Balances a Third Higher When Multiple Accounts are Considered
EBRI | 5/30/2012
Because… Even though the average IRA balance is a third higher when multiple accounts are taken into account, the total of $91,864 is still far from being sufficient to cover retirement expenses. ICI reveals that 68% of households that own IRAs invest in mutual funds. As mutual funds are the top IRA choice for job changers and those without employer-sponsored plans, fund firms are in the best position to guide investors through the maze to ensure they are not overwhelmed by myriad investment choices.
2) Western Asset Funds to Drop Legg Mason Name in Sales Push
Bloomberg | 5/31/2012
Because… While competent portfolio managers and solid investment approaches are key factors to attract investors, having a strong brand differentiates a firm and helps foster the business growth. Western Asset is a reputable fixed-income manager in the institutional marketplace. But for Legg Mason, which is mired in net redemptions for 18 consecutive quarters, whether it can leverage the Western Asset name in the retail space and successfully stem outflows remains to be seen.
3) Invesco Shakes Up Its Distribution Team
Investment News | 6/4/2012
Because… Both asset managers and distributors are finding themselves at a crossroads where they have to realign business functions to deliver services in a more efficient and effective way. Other firms that are undergoing reorganization include UBS and Morgan Stanley Smith Barney (MSSB). UBS is integrating the investment advice and research of its wealth units into a single unit. MSSB will merge Investment Strategy and Client Solutions and MSSB Capital Markets to create a new Investment Products and Services division.
Special Alert: Transit of Venus
NASA | 6/5/2012
Because… This will be the last transit of Venus to occur in our lifetime. The next transit will occur in December 2117.
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Total estimated outflows from long-term mutual funds were $4.92 billion for the week ended Wednesday, May 23, according to the Investment Company Institute (ICI). This week marks the first time since the first week of 2012 that overall flows slipped into negative territory. Investor concern regarding the viability of Spanish banks and whether Greece will remain in the euro dragged on sentiment. Domestic Equity led outflows with $7.2 billion, while its World counterpart only managed to gather $184 million in net inflows. Bond funds garnered nearly $2.9 billion, but this significantly decreased total from recent months is the lowest intake since inflows of $2.7 billion during the first week of the year. Finally, Hybrid funds broke its 2012 streak of weekly inflows with $695 million in net outflows.
Source: Investment Company Institute
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1) Putnam’s Retirement Calculator Crunches Health Expense Data
Registered Rep | 5/24/2012
Because… Putnam’s tool will incorporate health care expenses into retirement planning. On one hand, the cost of health care is expected to continue rising significantly. This new feature may provide an incentive for people to save more in order to cover health care spending. On the other hand, medical cost is a variable that is hard to estimate. Whether the assumptions used for the projection, subject to substantial uncertainties, are realistic and practical will be a topic for debate.
2) Fidelity: Facebook Trading Issues Affected Clients
The Wall Street Journal | 5/24/2012
Because… Fidelity is not the only firm whose clients were affected by the Facebook trading issue. Investors are feeling frustrated by Nasdaq’s trading glitch. It is critical for brokerage firms to answer all client questions and alleviate their concerns. Firms need to show compassion, disclose in detail how they work with regulators and the exchange on behalf of their clients, and provide timely updates on what steps they have taken in an effort to minimize investor losses.
3) May 29 is '529 Day,' yet Edward Jones Survey Reveals that Nearly Two-Thirds of Americans Don't Know What They Are
PR Newswire | 5/24/2012
Because… Today is National 529 Day. Assets in 529 plans reached a record-high $145 billion at the end of 2011, up 5% from year-end 2010, according to the ICI. Although the education saving is considered an important financial goal, investors’ lack of familiarity with 529 plans has prevented the industry from growing faster. Some fund firms have enhanced product design or upgraded plan services, but it is more imperative for asset management firms to work with the states in order to raise investor awareness of 529 college savings options.
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Total estimated inflows to long-term mutual funds were $3.90 billion for the week ended Wednesday, May 16, according to the Investment Company Institute (ICI). In addition to the total intake, this week witnessed decreased flows across all objectives from the prior week. Equity funds experienced nearly $3.6 billion in outflows. Although Equity outflows were primarily driven by the $3.4 billion in outflows from Domestic Equity, World Equity funds posted $117 million in the red after six consecutive weeks of registering positive sales. Despite a 2% decrease from the prior week, Taxable Bond continued to lead sales with nearly $6.0 billion in net inflows, while Municipal Bond gathered $1.2 billion. With $243 million in net inflows, Hybrid Funds suffered a 61% decrease from its intake of $627 million during the prior week.
Source: Investment Company Institute
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1) Money Managers Note Heightened Interest in Low-volatility Strategies
Pensions & Investments | 5/14/2012
Because… Asset managers are paying more attention to helping investors cope with market volatility; however, volatility-themed funds have yet to be widely available in the retail market. Some funds have incorporated volatility-control mechanism into their investment strategies, but fund firms need to aggressively market such product features in order for investors to gain awareness of investment options that can combat volatility.
2) Facebook: Many Mutual Funds Already Have a Stake
CNNMoney | 5/18/2012
Because… Following one of the most highly anticipated IPOs on Friday, Facebook shares dropped 11% yesterday and fell another 9% today with a loss of 18% from their $38 IPO price. CNNMoney reported that nearly 70 mutual funds have snapped up pre-IPO shares on private markets. Shareholders of these funds may become worried about the bumpy ride and start to question the stock’s valuation. Portfolio managers who have invested in Facebook need to openly discuss their views and explain the rationale for owning the stock.
3) BlackRock Announces Secondary Offering of its Common Stock held by Barclays
Business Wire | 5/21/2012
Because…Barclay’s decision to dispose of its entire 19.6% stake in BlackRock, valued at $6.1 billion, is another example of banks responding to stricter regulations. The Basel III rules require banks to hold more capital against minority stakes in asset managers and other firms. This has forced Barclays to reassess its investments and withdraw from unprofitable positions in order to optimize its capital structure, bolster the return on equity, and maximize shareholder value.
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Total estimated inflows to long-term mutual funds were $6.91 billion for the week ended Wednesday, May 9, according to the Investment Company Institute (ICI). This intake is a dramatic increase from the $2.2 billion gathered during the prior week. Although Equity funds continued in the red, the $2.4 billion in net outflows among Domestic Equity funds was an improvement from the nearly $5.5 billion in outflows during the prior week. World Equity garnered $1.1 billion—another uptick from the $142 million gathered during the prior week. Taxable Bond continued to drive sales with nearly $6.1 billion, while Municipal Bond took in $1.5 billion. Hybrid funds posted $617 million in net inflows compared to $36 million during the prior week.
Source: Investment Company Institute
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1) Schwab Research Finds Gap Between Employer and Employee Views on Retirement Preparedness Through 401(k) Plans
Business Wire | 5/7/2012
Because… The two Schwab surveys again highlight the need for financial firms to make people aware of the urgency of retirement savings. Firms need to stress the importance of contributing to retirement plans regardless of market conditions. The fear for asset erosion has shaken investor confidence and deterred them from adding more to their retirement accounts. Firms should send the message to investors that bad market timing and impulsive decisions can really hurt their retirement portfolios.
2) Credit Suisse's Asset Management Division Launches Credit Suisse Liquid Alternative Fund
PR Newswire | 5/10/2012
Because… Investors who are turning to alternatives for diversification and risk management are placing increased emphasis on liquidity. While some insist illiquid investments can produce alpha in the long run, more investors seem to favor registered, liquid, transparent alternatives. The volatile market in recent years has heightened the need for liquidity. As a result, a growing number of fund managers are using liquid instruments to replicate risk and return profiles of hedge strategies.
3) Deutsche Bank and Guggenheim Partners Focus Their Discussions on a Potential Sale of RREEF
Deutsche Bank | 5/11/2012
Because…Just as we thought DWS Investments would likely become a part of Guggenheim, the talks between Deutsche Bank and Guggenheim fell apart. The future has remained unclear for a firm that has already gone through a series of acquisitions in the past. This uncertainty will potentially have a negative impact on portfolio manager turnover, investment culture, and fund performance records, which in turn can affect the firm’s value on the market.
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Total estimated inflows to long-term mutual funds were $2.24 billion for the week ended Wednesday, May 2, according to the Investment Company Institute (ICI). Equity funds slipped back into negative territory with $5.3 billion in net outflows after posting inflows during the prior week. Domestic Equity experienced $6.6 billion in net outflows, while World Equity gathered $1.3 billion in net inflows. Taxable Bond continued to drive sales, with $6.4 billion in net inflows, representing a 37% increase from the prior week’s total. With nearly $1.1 billion in net inflows, Municipal Bond saw a 31% increase from its intake during the prior week. On the other hand, Hybrid funds stayed in the black with $36 million in net inflows, but it was a significant decline from the $945 million intake during the prior week.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $7.60 billion for the week ended Wednesday, April 25, according to the Investment Company Institute (ICI). This total estimated intake represents a 25% increase from last week’s inflows of $6.10 billion. Equity funds experienced its second consecutive week in positive territory with $927 million. Domestic Equity suffered $1.6 billion in net outflows—a marked improvement from $8.7 billion in outflows during the prior week—while its World counterpart gathered $2.5 billion in net inflows. Taxable Bond continues to lead sales with nearly $4.9 billion in net inflows. Municipal Bond garnered $825 million, a dramatic uptick from $399 million during the prior week. With $995 million in net inflows, Hybrid funds experienced an 18% drop from the prior week’s intake of $1.2 billion.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $6.48 billion for the week ended Wednesday, April 18, according to the Investment Company Institute (ICI). Equity funds managed to pull in $48 million during the week, but its two components represented opposite sides of the spectrum. While Domestic Equity bled $8.68 billion in net outflows, Foreign Equity garnered $8.73 billion in net inflows. With nearly $1.2 billion in inflows, Hybrid funds experienced an 87% increase from its intake during the prior week. Investors continue to remain conservative, putting nearly $4.9 billion and $399 million into Taxable and Municipal Bond funds, respectively.
Source: Investment Company Institute
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1) CITs Present Huge Opportunity for Investment Managers in Projected $7 Trillion DC Market
SEI | 4/17/2012
Because… The downward fee pressure has driven plan sponsors to look for investment managers that offer collective investment trusts (CITs). Fund firms that consider launching CITs need to assess opportunities and challenges, determine how the CIT fits into their overall business and investment management strategy, evaluate target markets, and develop fee structures and distribution strategies that would be least likely to cannibalize existing business.
2) ICI and U.S. Chamber of Commerce File Lawsuit Challenging CFTC Rule
ICI | 4/17/2012
Because… The lawsuit was filed with the belief that all funds would be affected by the CFTC rule. ICI and the Chamber of Commerce argue that “the CFTC’s new rule looks more like regulation for regulation’s sake. The new rule creates confusion, not clarity, by subjecting mutual funds to redundant, overlapping, and unnecessary regulatory requirements. The CFTC completely ignored its statutory duty to evaluate the costs this unnecessary regulation will undoubtedly impose on the economy.” We will monitor how this case will unfold.
3) ETF Providers Announce Creation of the National ETF Association, "NETFA", the First US-Based ETF Industry Trade Association
PR Newswire | 4/23/2012
Because…Although investors now have an easy access to ETFs, many of them still do not have adequate ETF knowledge. There are misunderstandings even among regulators, which will undoubtedly hurt ETF industry growth. If the newly-established METFA can play an active role in educating investors and regulators, help them separate myths from realities, and represent ETF sponsors in public debates and the rule-making process, it will benefit the industry in the long run.
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Total estimated inflows to long-term mutual funds were $3.87 billion for the week ended Wednesday, April 11, according to the Investment Company Institute (ICI), marking a 48% decrease from the prior week’s estimated inflows. All objectives witnessed decreases from the prior week with the exception of Domestic Equity despite experiencing outflows. Domestic Equity’s outflow of $1.5 billion was an improvement from $4.5 billion in outflows during the prior week. Foreign Equity gathered $617 million in net inflows, bringing Equity’s overall outflows to $918 million. With $630 million in net inflows, Hybrid funds witnessed a dramatic 42% decrease from the prior week. Taxable Bond funds drove sales with nearly $3.9 billion in inflows but suffered a 57% decrease from its intake during the prior week. Municipal Bond collected $267 million in net inflows—its lowest intake this year with the exception of falling into the red during the week ended March 21.
Source: Investment Company Institute
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1) Can Corporate Culture Predict Fund Performance?
The Wall Street Journal | 4/11/2012
Because… Even though the academic research found little correlation between Morningstar’s stewardship ratings and fund performance, we still believe Morningstar’s criteria which examine corporate culture, fund board quality, manager incentives, fund fees, and regulatory history can help investors evaluate asset managers and make informed decisions. These factors are not supposed to be the only measures in fund selection, but they can be valuable tools to complement quantitative analyses.
2) BlackRock's Street Shortcut
The Wall Street Journal | 4/12/2012
Because… This will be the first initiative by an asset manager to set up its own bond trading platform. BlackRock’s goal of launching such a platform is to reduce trading costs, but significant challenges may lie ahead. It remains unknown how many institutional investors will sign onto the platform, whether the platform can provide the necessary liquidity and tight bid/ask spreads, and how well it will perform with a limited number of users when markets become extremely volatile.
3) Commodities Funds Under Fire
Investment News | 4/15/2012
Because… The rule that requires the registration with the CFTC will impose a considerable burden on fund providers that already register with the SEC and add compliance costs to already expensive commodities funds. Commodities have been found to be more closely correlated to the broad stock market over the past three years. The increased correlation and heightened regulatory scrutiny will potentially slow down the development of commodities funds.
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Total estimated inflows to long-term mutual funds were $7.71 billion for the week ended Wednesday, April 4, according to the Investment Company Institute (ICI). This overall estimated total represents a 133% increase from the prior week’s total of $3.31 billion. Domestic equity bled its largest amount since the first week of January with nearly $4.3 billion in net outflows. However, Foreign Equity garnered $1.2 billion, bringing the overall Equity total to $3.1 billion in net outflows. Hybrid funds experienced its least amount of inflows since the first week of January despite gathering nearly $1.1 billion in net inflows. On the other hand, Taxable Bond gathered its largest inflows in 2012, pulling in nearly $9.1 billion while Municipal Bond captured $572 million in net flows.
Source: Investment Company Institute
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1) Touchstone Assets to Grow to $13 Billion with Acquisition of Certain Fund Assets of Fifth Third Asset Management
Business Wire | 4/2/2012
Because… With long-term fund assets transferred to Touchstone and money market assets reorganized into Federated money market funds, Fifth Third is exiting the retail mutual fund business (Fifth Third Asset Management will still sub-advise certain funds for Touchstone). We expect more banks to divest non-core operations in order to raise capital and improve their balance sheets. Spinoffs like this provide excellent opportunities for pure asset management firms to achieve economies of scale through acquisitions and enhance their competitive position.
2) Retirement Assets Total $17.9 Trillion in Fourth Quarter 2011
ICI | 4/2/2012
Because… Although total U.S. retirement assets were as high as $17.9 trillion, retirement savings accounted for only 36% of all household financial assets. Several recent studies have all pointed to the concern about retirement savings across different generations. IRI research found few boomers are optimistic in their financial future. A T. Rowe Price survey revealed that most younger investors don't believe they will have enough money for retirement. There should be a wealth of untapped opportunity in the retirement market for financial firms to pursue.
3) JOBS Act Provision Opens Door to Hedge Fund Advertising, Trade Group Urges Caution
Reuters | 4/10/2012
Because… The JOBS (Jumpstart Our Business Startups) Act will allow hedge funds to market their offerings to the public through mass media channels. For qualified institutional investors and accredited high-net-worth individuals, the exclusivity that comes with hedge fund investing will no longer exist as fund managers will likely provide more access to fund information in order to reach a broader audience. The lifting of the nearly 80-year-old advertising ban will particularly benefit smaller hedge funds if these managers feel comfortable openly discussing their strategies.
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1) SEC Signup Draws More Alternatives Managers Than Expected
Pensions & Investments | 3/29/2012
Because…The 1,300 registration applications the SEC expects to receive represent a 70% increase from the 750 advisors the agency estimated last July. Hedge funds have been drawing a growing backlash over high fees, lack of transparency, and lack of regulations. The registration requirement can improve transparency and promote accountability, which should help potential investors perform due diligence. Institutional investors, in particular, are keen to invest with registered managers.
2) RiverPark Introduces RiverPark Long/Short Opportunity Fund
Business Wire | 4/2/2012
Because…Converting an existing hedge fund to a ’40 Act mutual fund can make an investment strategy available to a broader range of investors, although the asset manager has to forgo the common 2/20 fee arrangement. More hedge fund conversions would mean a more competitive playing field for mutual fund firms planning to offer hedge-like strategies, as fund managers can cite the past performance of the hedge fund when marketing the new mutual fund.
3) Pimco’s Total Return Fund Attracts $1.7 Billion in First Quarter
Bloomberg | 4/2/2012
Because…Many people have been asking the question of whether ETFs are cannibalizing mutual funds. The substantial flows into the Total Return Fund, despite the launch of an ETF version, demonstrate that funds with a strong performance record and a reputable manager can still be appealing to investors. The worry that ETFs have posed a lethal threat to the mutual fund industry seems exaggerated at this stage. In addition, the daily disclosure of ETF holdings has not raised the risk of front-running as many have feared.
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Total estimated inflows to long-term mutual funds were $6.40 billion for the week ended Wednesday, March 21, according to the Investment Company Institute (ICI). With the exception of the first week of 2012, overall net flows have remained positive. Municipal Bonds had a bumpy ride and suffered $135 million in net outflows, marking the first time they have fallen into negative territory in 2012. Taxable Bond funds continued to lead sales with nearly $5.8 billion in net inflows, bringing cumulative fixed income inflows to approximately $5.7 billion—its second lowest intake in 2012. Domestic Equity remained in the red, with outflows of nearly $1.8 billion, while Foreign Equity gathered $713 million. Hybrid funds continued their positive run in 2012 with $1.2 billion in net inflows.
Source: Investment Company Institute
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1) The Hartford to Focus on Property and Casualty, Group Benefits and Mutual Funds Businesses
The Hartford | 3/21/2012
Because…The Hartford’s announcement to exit the annuity business and sell the retirement plan business was shocking to its employees, distribution partners, as well as industry observers. For a company with more than 200 years of history, shedding these business units must have been a tough decision. While difficult market conditions have forced The Hartford to reassess its business focus, the pressure from its largest shareholder, a hedge fund manager with an 8.5% stake, may have played a contributory role.
2) Merk to Launch a Hard Currency ETF
SEC Filings | 3/21/2012
Because… PIMCO is not the only manager to put an ETF wrapper onto an existing fund. Merk, a currency specialist, is also planning to launch an ETF version of its Hard Currency Fund. The new ETF (HRD), which will be actively managed, is joining a small, but growing group of currency ETFs, currently dominated by WisdomTree, Rydex|SGI, and PowerShares/Deutsche Bank. Since most currency ETFs are index-based single-currency ETFs, HRD may attract investor attention with its broad-based currency exposure.
3) TIAA-CREF Survey Reveals Majority of Americans Miss Opportunity to Contribute to IRAs for Retirement Savings
TIAA-CREF | 3/26/2012
Because… The survey result that shows only 22% of Americans are contributing to an IRA is truly alarming. Without the assistance of their employers, individual investors have to make investment decisions by themselves. Even when they rely on their advisor for investment choices, they may still want to make sure their advisor acts on their behalf. So fund firms should assume the responsibility of providing educational resources and sharing investment insight and advice to enhance investor knowledge.
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Total estimated inflows to long-term mutual funds were $7.76 billion for the week ended Wednesday, March 14, according to the Investment Company Institute (ICI). Domestic Equity remained in the black for the fourth consecutive week with nearly $2.9 billion in outflows with its foreign counterpart managed to collect $306 million. Despite a 14% decrease from its intake during the prior week, Taxable Bond enjoyed its second highest total in 2012 with nearly $7.8 billion in net inflows. Municipal Bonds garnered $1.3 billion, bringing the total bond inflows to approximately $9.1 billion. Hybrid funds experienced a 16% decrease, slipping to $1.2 billion from nearly $1.5 billion during the prior week.
Source: Investment Company Institute
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1) Fixation with Fixed-Income Funds Since 666 has Burned Investors
Investment News | 3/7/2012
Because…The fear of losing money has prevented traumatized investors from making sound decisions and getting back into the equity market, although S&P 500 has posted a strong 12.1% return this year and the DJIA reached multi-year highs, topping 13,000 at the end of February. There is an urgent need for asset management firms to talk about the consequences of putting all money into low-yielding bonds and money markets and to demonstrate why stocks should be an essential component of everyone’s portfolio.
2) Money Manager Profitability Growth Stays Flat in 2011, says Casey Quirk
Pensions & Investments | 3/8/2012
Because… The analysis is focused on the profitability of publicly-traded money management firms, but it reflects the state of the entire industry. Investors’ flight to safety, the demand for passively-managed funds, and infrastructure investment to keep up with competition have squeezed profit margins at asset management firms. To maintain the same rate of profit growth as in the past, firms may need to resort to the development of alternative investment products or expand through acquisition to generate economies of scale and lower overall costs.
3) American Funds Taking its Talent to YouTube Amid 'Difficult Time'
Investment News | 3/13/2012
Because… American Funds, known for keeping its low profile, has finally stepped into social media. The firm has been hit by net outflows for 34 consecutive months. It lost $10.3 billion in the first two months after bleeding $81.5 billion in 2011. The use of social media may not stem the outflows immediately, but the firm’s willingness to embrace new marketing tools can help bridge communication gaps between advisors and portfolio management teams, cultivate an investor community, and establish thought leadership to restore trust.
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Total estimated inflows to long-term mutual funds were $12.09 billion for the week ended Wednesday, March 7, according to the Investment Company Institute (ICI). This total, which more than doubled from the prior week, represents the second highest intake in 2012—during the week of February 8, total inflows reached $12.66 billion—and one of the best totals since 2010. As expected, Taxable Bond led sales with a record $9.1 billion, while Municipal Bond gathered nearly $1.7 billion. For the third consecutive week, Domestic Equity experienced outflows. However, this week’s $1.4 billion in outflows was a dramatic improvement from the $3.1 billion shed last week. Foreign Equity garnered nearly $1.3 billion during the week, pulling overall outflows to $126 million. Hybrid funds experienced a 10% decrease, slipping to $1.5 billion from nearly $1.7 billion during the prior week.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $5.51 billion for the week ended Wednesday, February 29, according to the Investment Company Institute (ICI). This total represents nearly half the $10.46 intake from the prior week and marks the lowest figure in 2012 since the first week when overall fund flows fell into the red. Once again, all broad asset classes garnered inflows with the exception of Domestic Equity which experienced outflows of $3.1 billion, marking the fifth week in 2012 that it fell into the red. Foreign Equity managed to garner $226 million in net inflows, a sharp drop from its $1.1 billion intake during the prior week. Taxable Bond drove sales with $5.6 billion in net inflows; however, this represents a 17% decrease from last week’s total. Municipal Bond gathered $1.1 billion in net inflows, a slight decline from its $1.4 billion intake during the prior week. On the other hand, Hybrid funds managed to etch past last week’s intake of $1.55 billion by gathering $1.65 billion in net inflows.
Source: Investment Company Institute
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1) Deutsche Bank Enters Exclusive Negotiations with Guggenheim Partners
Business Wire | 2/28/2012
Because… DWS Investments had $45.6 billion in U.S. long-term open-end fund assets as of year-end 2011. The addition of DWS assets would turn Guggenheim into one of the top asset management firms if the deal goes through. The acquisition would also give Guggenheim access to DWS’ muni bond fund management team, which has generated attractive long-term returns. In addition, the purchase would expand Guggenheim’s presence in the retail market.
2) PIMCO Introduces the Total Return ETF
PIMCO | 3/1/2012
Because…PIMCO’s Total Return ETF (TRXT) has raised $134 million within four days of trading. Its asset-gathering ability can be attributed to the PIMCO Total Return Fund’s strong track record, fund manager’s reputation, as well as TRXT’s low cost and enhanced transparency. The launch of TRXT will invigorate the stagnant active ETF industry. More importantly, PIMCO is setting an example of providing vehicle-agnostic investment options so that all investors, large and small, can benefit from professional investment management.
3) Mass-Affluent An Untapped Market for Banks and Credit Unions
Bank Investment Consultant | 3/6/2012
Because… Though the study focuses on banks and credit unions, it has implications for asset management firms as well. Compared to high-net-worth individuals, the mass affluent are not wealthy enough to quality for high-touch services from private bankers. However, with more people joining the club and the revenue generation potential, the inability to tap into this market segment will prove to be a huge mistake. For financial services firms to broaden their reach to the mass affluent, striking a balance between offering high-quality services and maintaining profitability is crucial.
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Total estimated inflows to long-term mutual funds were $10.79 billion for the week ended Wednesday, February 22, according to the Investment Company Institute (ICI). All broad asset classes garnered inflows with the exception of Domestic Equity which experienced outflows of $322 million, marking the fourth week in 2012 that it fell into the red. However, inflows of $1.1 billion into Foreign Equity managed to compensate and pulled the overall Equity asset class into positive territory with $809 million. Taxable Bond drove sales, once again, with nearly $7.0 billion in net inflows—a record total for 2012 since garnering $6.5 billion during the week of January 25. Despite a 40% decrease from the previous week, Hybrid funds was the second leading asset class to generate inflows with $1.6 billion followed by Municipal Bond with $1.4 billion in net inflows.
Source: Investment Company Institute
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1) SEC Widens Probe of Exchange-Traded Funds
Reuters | 2/17/2012
Because… As many are wondering whether the increasing regulatory scrutiny would have a negative impact on the ETF industry growth, ICI published research results that point out that ETFs should not become a scapegoat of market volatility. The ICI analysis shows that episodes of heightened volatility predate the rapid growth of ETFs; volatility is a global phenomenon and occurs in markets where ETFs play a much smaller role than they do in the U.S.; and macroeconomic events offer far more plausible explanations for episodes of volatility.
2) New Retirement Realities and Longer Life Expectancy Cause Many to Rethink Their Approach to Planning for Later Years
Business Wire | 2/22/2012
Because… With more people approaching retirement, their concerns about outliving their savings have come to the forefront. They start to question whether their savings would meet their desired lifestyle, to what extent inflation would have a dampening effect on retirement investing, how much they could spend to make their savings last, and how they should balance growth, income, taxes, and liquidity needs within their portfolio. Financial services firms need to address these concerns and help people achieve their savings goals.
3) Fidelity Showcases Thought-Provoking Insights on Range of Global Themes from its Extensive Team of Investment Research Professionals
Fidelity | 2/27/2012
Because… In an age of information overload, people often feel overwhelmed by an excessive amount of information, so insights and perspectives from an industry leader that help sort out current marketplace issues are very valuable. Thought-provoking viewpoints on the pulse of the market or industry evolution can stimulate dialogue with clients as well as prospects. Thought leadership can also improve a firm’s visibility and credibility as well as help build a strong reputation.
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Total estimated inflows to long-term mutual funds were $11.90 billion for the week ended Wednesday, February 15, according to the Investment Company Institute (ICI). This marks the sixth consecutive week of overall inflows; however, the total represents a 10% decrease from last week’s $13.18 billion in net inflows. For the second consecutive week, all broad asset classes garnered inflows, led by Taxable Bond’s $6.5 billion—its largest intake throughout 2012. Municipal Bond gathered $1.7 billion in net flows, while Hybrid funds collected $2.6 billion. This is the second consecutive week that Equity funds remained in the black. Domestic Equity managed to garner $35 million in assets, a significant decrease from its $1.9 billion intake during the prior week. Foreign equity dropped slightly from $1.7 billion during the week of February 8 to $1.0 billion in net inflows.
Source: Investment Company Institute
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1) In India, a Tough Row to Hoe for T. Rowe
Wall Street Journal | 2/14/2012
Because… The challenges T. Rowe Price is facing highlight the difficulty for asset management firms that look to exploit fast-growing overseas markets. Expanding presence in developing markets carries special risks. Besides economic and market factors, uncertainty caused by government regulations, changing investor behavior, divergence in management philosophy as well as cultural differences, competition from local investment firms, and lack of brand recognition can all affect a firm’s ability to survive and thrive in a foreign market.
2) New Service Aids ETF Use in 401(k)s
Investment News | 2/14/2012
Because… For a long time, operational constraints prevented retirement plans from adding ETFs to their investment menu. With technological advances, accounting and recordkeeping systems have evolved to accommodate ETFs within a 401(k) framework. This will lead to greater acceptance of ETFs in 401(k) plans. Meanwhile, ETF providers will become more proactive in seeking distribution opportunities in the defined contribution space. We expect to see ETF sponsors allocate more resources to develop relationships with plan sponsors and advisors.
3) The Principal Enhances Retirement Business Building Resources for Financial Professionals
The Principal | 2/14/2012
Because…Firms that provide business building resources can compete more effectively with others that focus solely on investment products. Billions of dollars moving in and out of retirement accounts are luring more advisors into the retirement business, but advisors constantly grapple with how to build and grow their book of business. Actionable tips and techniques, targeted practice management tools, and materials specially designed for prospecting and marketing should help advisors enhance their practice and explore new ways to uncover hidden opportunities.
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1) Deloitte: 401(k) Plan Sponsors Less Confident that Employees Will be Financially Prepared for Retirement
PR Newswire | 2/6/2012
Because… The survey findings are strikingly similar to the results of an Aon Hewitt Survey published in January. Aon Hewitt reported that just 4% of employers are very confident that their workers will retire with adequate retirement assets, and 18% are confident that workers will be able to manage their income during retirement. These surveys underscore the urgency of helping plan sponsors enhance plan features and equipping plan participants with tools and educational resources to increase their plan participation.
2) Direxion Launches Managed Futures Strategy Mutual Fund Tied to Next Generation Index
PR Newswire | 2/13/2012
Because… Sales of managed futures funds picked up steam in 2011. The category garnered $3.5 billion, although the Barclay CTA Index dropped 3.05% in the year, representing the largest loss for managed futures in 32 years. With investor interest on the rise, we expect more asset managers to develop such strategies to satisfy the increasing demand. Since managed futures returns are highly dependent on manager skill, the selection of an experienced manager or a reliable index (for index-based funds) is critical.
3) Lord Abbett Launches Enhanced Individual Investor Website
Lord Abbett | 2/13/2012
Because… Many firms like Lord Abbett have realized that a Website can be a valuable weapon in their marketing arsenal. It is such an indispensable communication channel that firms which underestimate its power will be put at a competitive disadvantage. For a successful Website revamp, it is vital to stress the value delivered to investors. A firm’s unique investment approach or a distinctive business principle should be clearly conveyed to the public. The lack of emphasis would be particularly detrimental to small and mid-sized firms.
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Total estimated inflows to long-term mutual funds were $8.00 billion for the week ended Wednesday, February 1, according to the Investment Company Institute (ICI). This marks the fourth consecutive week of overall inflows; however, the total represents a 30% decrease from last week’s $11.46 billion in net inflows. For the second time this year, all broad asset classes garnered inflows with the exception of Domestic Equity, which experienced $1.8 billion in estimated outflows. Foreign equity’s $108 million intake was not able to compensate for the loss. Taxable Bond continues to drive sales and collected nearly $5.9 billion in net inflows, while Municipal Bond gathered $1.6 billion during the week. Hybrid funds experienced nearly $2.2 billion, representing a 16% decrease from last week’s intake of $2.6 billion.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $6.34 billion for the week ended Wednesday, January 18, according to the Investment Company Institute (ICI). Domestic equity slipped back into the red by posting outflows of $804 million, while foreign equity managed to gather $330 million in net inflows. Despite posting a 38% decrease from its total inflows during the prior week, taxable bond continued to drive sales with inflows of $3.8 billion. Inflows from municipal bond remained static from the prior week, collecting approximately $1.7 billion. Also, hybrid funds have maintained their positive streak since late November, with nearly $1.3 billion in net inflows during the week.
Source: Investment Company Institute
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1) Study Quantifies Benefit of Retirement Advisor
401khelpcenter.com | 1/13/2012
Because…The more plan sponsors rely on plan advisors, the more help plan advisors will need from service providers. Working with retirement plan advisors requires a different set of skills than servicing advisors in other market segments. Firms should have dedicated resources to cultivate long-term relationships, share insights to help them stay abreast of industry trends, develop strategies to assist them in expanding business, and provide customizable tools for them to deliver better services to their clients.
2) SPY, The 1st US ETF, Now A $100 Billion Fund
IndexUniverse.com | 1/20/2012
Because… The rise of SPY assets to $100 billion indicates more investors are embracing ETFs for portfolio construction. SPY, one of the most widely held and heavily traded ETFs, has been used by investors for both strategic and tactical purposes. While its dominance will not be challenged in the near future, the competition from other similar offerings--such as iShares S&P 500 Index Fund, Vanguard S&P 500 ETF, and Rydex S&P 500 Equal Weight ETF--should not be shrugged off.
3) IRI Exclusive Report: The Retirement Readiness of Generation X
IRI | 1/23/2012
Because… The need for helping Gen Xers is pressing as the information overload, recent market crash, and lack of investment education have shaken their confidence about making sound financial decisions. Compared with Baby Boomers, Gen Xers face tougher financial realities because it may take longer for them to pay off all their debt, they are less likely to receive pension benefits, Social Security income cannot be counted on, their life expectancy will be increased, and medical costs will rise by the time they retire.
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Click here for FUSE trends for 2012.
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Total estimated inflows to long-term mutual funds were $11.25 billion for the week ended Wednesday, January 11, according to the Investment Company Institute (ICI). This intake reverses the red tide of three consecutive weeks of net outflows and marks the first time since the beginning half of 2011 we’ve seen such an impressive total. Most noteworthy are the positive net inflows of $753 million in domestic equity. Investors have not put their dollars in U.S. stock funds since August. Meanwhile, foreign equity also drew $681 million. Taxable bond drove sales with $6.1 billion, while municipal bond garnered $1.7 billion. Hybrid funds gathered nearly $2.0 billion, a record since collecting $2.3 billion in early November.
Source: Investment Company Institute
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1) Funds Trail S&P 500 Index by Most Since 1997
Bloomberg | 1/10/2012
Because… Improving fund performance is crucial for asset management firms to boost investor confidence and bring them back to the equity market. While telling investors to stay the course is absolutely necessary, the message won’t be effectively delivered if funds keep generating lackluster returns. It has become increasingly harder to outperform benchmarks. It is time for firms to reassess their models, revise investment strategies, and incorporate new factors that can better deal with market volatility.
2) Charles Schwab Launches Unique 401(k) Plan Solution Designed to Address Barriers to Retirement Saving and Investing
Business Wire | 1/10/2012
Because… The DOL’s rules on fee transparency, plan sponsors’ fiduciary concerns, and plan participants’ demand for low-cost options all drive a shift toward a greater use of passive investments. Though Schwab is not the only firm that offers an all-index option for 401(k) plans, its inclusion of both proprietary and non-proprietary funds, an independent advisory service, and an interest-bearing, FDIC-insured savings feature could make the new Schwab program popular among plan sponsors.
3) Transamerica Study Reveals Women Don’t Talk Enough About Retirement
Transamerica | 1/10/2012
Because… The research found only 8% of women surveyed believed they are building a large enough retirement nest egg. As more women enter the workforce, take managerial positions, or own small businesses, they have become wealthier than decades ago. On the other hand, women tend to live longer, spend more, and are less knowledgeable about financial matters. So they present a tremendous opportunity for advisors. Asset managers that can help advisors tap into this market segment will set them apart from the competition.
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Total estimated outflows from long-term mutual funds were $5.59 billion for the week ended Wednesday, January 4, according to the Investment Company Institute (ICI). The first week of the New Year marks more than double the amount of $2.6 billion in outflows experienced during the prior week. Domestic equity and foreign equity remained in the red, shedding $7.1 billion and $2.3 billion, respectively. On the other hand, taxable bond continued to drive sales with $2.1 billion in net inflows, while municipal bond gathered nearly $1.2 billion. Hybrid funds maintained its streak of inflows by garnering $457 million.
Source: Investment Company Institute
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1) Pimco Attracts $60 Billion as New Stock Funds Offset Total Return’s Woes
Bloomberg | 1/5/2012
Because… Fund firms could take a leaf out of PIMCO’s book. While investors’ flight to fixed-income instruments has certainly helped PIMCO raise assets, it is the firm’s product development effort that has contributed to its significant asset growth. From the introduction of go-anywhere funds to the expansion into stocks, PIMCO has built a solid, diversified product line that gives the firm the ability to weather various market environments without relying solely on its flagship fund.
2) ETF Growth Slows in 2011
On Wall Street | 1/5/2012
Because…Although numbers indicate a slowdown in 2011, we expect the ETF industry to continue its growth in a difficult market. The big three – iShares, SSgA, and Vanguard – will remain dominant, but there should be room for other players as well. The rise of alternative fund sponsors (e.g. IndexIQ and ETF Securities) and new entrants with enhanced-index offerings (e.g. Russell and Northern Trust) shows that true innovations that meet investor needs, rather than opportunistic attempts, will improve an ETF provider’s chance of success.
3) Wave of New Offerings Coming from Flagging American Funds
Investment News | 1/9/2012
Because… The headline that a firm which rarely launches funds will roll out new offerings evoked much enthusiasm, but the fledgling enthusiasm dissipated the minute we learned that each of eight funds will be a fund-of-funds that invests in existing American funds. Investors are already pulling money out. Would new funds composed of existing funds be able to stem massive outflows? Would new funds be closet indexers as the holdings overlap issue among American funds has become a growing concern? Questions like these need to be answered…
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Total estimated outflows from long-term mutual funds were $2.62 billion for the week ended Wednesday, December 28, according to the Investment Company Institute (ICI). This estimated total marks the third week of overall outflows suffered during the month of December. As was the case throughout the majority of the year, domestic equity drove outflows of nearly $4.0 billion, while foreign equity experienced $1.2 billion in outflows. Taxable bond led inflows, despite only capturing $1.2 billion—its lowest inflow throughout the month. Municipal bond gathered $977 million in net inflows. Throughout the month, hybrid funds remained in the black and gathered $389 million during the week.
Source: Investment Company Institute
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1) M&A deals about the same, but dollars involved down
Pensions & Investments | 12/15/2011
Because… With such big firms as DWS and TCW on the block, the deal value could go up next year. However, whether the deals can go through will be determined by various factors, including whether these firms can get a premium valuation in the marketplace, what buyers are willing to pay for at this point of time, and how badly the selling parents want to divest their subsidiaries to get the much-needed capital.
2) Forward Plans More Alts Road Shows for 2012
The Mutual Fund Wire | 12/20/2011
Because…Allocations to alternatives will increase as the high level of market volatility continues into 2012. With alternatives expected to play a bigger role in investor portfolios, education is becoming indispensable. For advisors planning to invest in alternatives, just knowing what they are is not enough. Guidance from product providers on how to use different alternative strategies or asset classes to better manage risks would be more helpful.
3) ING U.S. Encourages More Consumers to Make Retirement Planning and Saving a Priority in the New Year
PR Newswire | 12/21/2011
Because… The New Year is a time to reflect on how we as an industry should help American people save for the future. By identifying five simple but practical resolutions, ING is raising public awareness on the importance of planning. Market volatility, economic slump, upcoming election, and regulatory changes could deter investors in 2012, so financial firms need to motivate and engage them so that more people know how to set long-term savings goals and put their financial priorities in order.
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Happy Holidays!
Total estimated inflows to long-term mutual funds were $823 million for the week ended Wednesday, December 14, according to the Investment Company Institute (ICI). This estimated total reverses two consecutive weeks of outflows. Domestic equity continued to drive outflows, with nearly $4.0 billion in outflows followed by $1.5 billion in outflows from foreign equity. On the other hand, taxable bond led inflows of $4.7 billion. Municipal bond gathered $868 million in net inflows; however, this estimated total represents a 40.4% decrease from last week’s intake of $1.5 billion in net inflows. Hybrid funds experienced its second consecutive week of net inflows with $745 million, representing a 31.6% decrease from the $1.1 billion garnered during the prior week.
Source: Investment Company Institute
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1) JPMorgan Fund CEO Woos Clients with Simplicity
Reuters | 12/13/2011
Because… JP Morgan is the fastest growing firm among the ten largest fund firms (including both long-term mutual fund and ETF assets), with assets rising 14% and 18% from year-end 2010 and a year ago, respectively. It has raked in $18 billion this year through November, becoming the industry’s 4th best-selling firm. While firms do not need to follow strategies implemented by industry leaders, benchmarking best practices should help them identify improvement options.
2) Nuveen Helps Advisors Build Strong Retirement Plan Practice
Business Wire | 12/14/2011
Because… The need for advice among plan sponsors has spurred the growth of retirement plan advisors. As more advisors enter the field and take market shares away from insurance advisors and benefit brokers, financial services firms targeting the retirement market cannot afford to overlook the needs of this group. Asset managers that have a better understanding of these advisors and develop value-added programs will gain a competitive advantage in the DCIO space.
3) Schwab Cuts Ribbon on First Franchise Branch
Investment News | 12/14/2011
Because… The opening of Schwab’s first franchise branch has drawn much attention to the firm’s Independent Branch Services program. Schwab is basically leveraging its strong brand to expand its presence. While it is too early to predict whether the franchise model will be successful, we believe many in the industry will watch closely to see how Schwab balances the needs of existing company affiliates, independent franchisees, and independent RIAs.
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Total estimated outflows from long-term mutual funds were $3.34 billion for the week ended Wednesday, December 7, according to the Investment Company Institute (ICI). This estimated total marks the second consecutive week of outflows; however, it is a dramatic improvement from the $9.25 billion in outflows during the prior week. Concerns regarding European debt led to nearly $5.8 billion in outflows from domestic equity and $2.2 billion for its foreign counterpart. On the other hand, hybrid funds reversed its three week streak of outflows and garnered $1.1 billion in net inflows for the week. Bond funds gathered $3.5 billion, with taxable bond funds contributing $2.1 billion and $1.5 billion from municipal bond funds.
Source: Investment Company Institute
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1) Vanguard Exchange-Traded Funds Begin Trading on Toronto Stock Exchange
Business Wire | 12/6/2011
Because…Expanding to foreign markets is a viable growth strategy for ETF providers, especially for large firms like Vanguard. High mutual fund fees, a burgeoning ETF industry, and dominance of top ETF issuers all suggest that Canada is a source of great market potential. With its scale, low-cost model, high-quality client services, and investor education initiatives, Vanguard should be well-positioned for asset gathering. Vanguard’s entry could also drive other Canadian ETF providers to reduce their management fees.
2) Morningstar Launches New Fixed-Income Sectors
Morningstar | 12/12/2011
Because… Fixed income markets are more complex than equity markets, so efforts to provide more detailed information that helps investors navigate the fixed income space should be commendable. However, the lack of domestic/foreign asset split, breakdown between developed and emerging markets, and transparency on currency exposure could frustrate investors’ attempt to optimize asset allocation. Morningstar will address some concerns in future rollouts, but problems related to inadequate disclosure by fund firms will not be easily fixed.
3) Goldman Sachs to Buy Mutual Fund Unit of Dividend Growth
Bloomberg | 12/12/2011
Because…Goldman Sachs is joining the likes of John Hancock and American Beacon to shore up investment capabilities through fund adoptions. In this case, both parties will benefit from the deal. For Dividend Growth Advisors, its shareholders will be able to enjoy the economies of scale, as evidenced by the proposed drop of 45 basis points in the Rising Dividend Growth Fund's expense ratio. Meanwhile, Goldman immediately has a 5-star offering that can satisfy investor demand for dividend-paying products.
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Total estimated outflows from long-term mutual funds were $9.24 billion for the week ended Wednesday, November 30, according to the Investment Company Institute (ICI). This estimated total reverses six weeks of total inflows. Equity funds suffered its largest outflow since July 27, with nearly $6.7 billion in outflows from domestic equity and approximately $3.0 billion from foreign equity. Hybrid funds experienced its third consecutive week in the red with net outflows of $778 million. Taxable bond funds managed to garner $709 million in net inflows—a dramatic decrease from its $6.2 billion intake during the prior week. Municipal bond also gathered $449 million in net inflows, bringing the cumulative bond total to nearly $1.2 billion in net inflows.
Source: Investment Company Institute
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1) Study: Small Business Owners Say Number of Workers Financially Unprepared for Retirement at Crisis Level
Nationwide | 11/28/2011
Because… Helping millions of small business employees save for retirement has increasingly become a top priority for financial firms. Multiple Small Employer Plan (MSEP), not a new concept, has yet to be widely utilized. MSEPs could lower costs and simplify administrative procedures for plan sponsors and open up new market opportunities for financial firms; however, providing services to a MSEP requires operational know-how, legal expertise, technological capacity, and most importantly, commitment.
2) Fund Executives Can't Live without Consultants
Pensions & Investments | 11/28/2011
Because… As investment consultants play a greater role in helping institutional investors with manager selection and asset allocation, asset management firms need to commit more resources to build and deepen consultant relationships. It is essential to have a dedicated team to work with consultants, understand both the firm’s investment process and consultants’ requirements, submit portfolio updates in a timely fashion, and share market insight and outlook with consultants to become their trusted partner.
3) Fidelity Plans Head-First Dive into ETFs
IndexUniverse.com | 12/2/2011
Because… A mutual fund giant that stayed on the sidelines for years is finally warming to ETFs. Industry-wide mutual fund redemptions as well as the significant asset decline of its flagship Magellan Fund may have prompted Fidelity to re-evaluate its ETF strategies. Though it seems late to the party, strong distribution capabilities and marketing muscle could turn Fidelity into a powerful competitor. Product differentiation and the determination of the pricing model will also be crucial to the success of the firm in the crowded ETF market.
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Total estimated inflows to long-term mutual funds were $1.40 billion for the period November 17 through November 22, according to the Investment Company Institute (ICI). This estimated total represents an astonishing 124% increase from the $625 million intake during the prior week. For the second consecutive week, bonds were the only funds to post net inflows, with taxable bond garnering the lion’s share of $6.2 billion and municipal bond gathering $333 million. Hybrid funds suffered outflows of $1.4 billion, but this estimate is quite an improvement from the nearly $4.6 billion shed during the prior week. Domestic equity appeared to have revival during the prior week with only $135 million in net outflows. However, this was short-lived, and domestic equity experienced $3.7 billion in net outflows, while foreign equity posted $23 million in net outflows.
Source: Investment Company Institute
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1) TD Ameritrade Announces the Launch of Amerivest Supplemental Income Portfolios
Business Wire | 11/21/2011
Because… The launch of Amerivest Supplemental Income Portfolios indicates that more distributors are responding to investor demand for steady retirement income. However, income is generated through investing in bond mutual funds, which may turn away investors looking for guarantees. Also, with the minimum investment requirement of $25,000 and the fee schedule ranging from 0.75% to 0.30%, the service is not accessible to average investors with a small savings account.
2) Are Benefits of Investing in Alternatives Overstated?
PLANSPONSOR | 11/22/2011
Because… The Center for Retirement Research study may dampen the enthusiasm of investors who are eager to increase their allocation to alternative investments. The study found that alternatives exerted a positive influence on returns before the crisis, but plans with alternative allocations actually performed worse than those without during the crisis. Research findings like this may not change asset managers’ plan to expand into alternatives, but they may give them pause to reassess the viability of their effort.
3) Legg Mason Files for Western Asset Ultra-Short Duration ETF
SEC Filings | 11/23/2011
Because… The competition among actively managed fixed-income ETFs is sure to become more intense. Besides Legg Mason, Federated also filed for the Active UltraShort Fixed Income ETF in August. The space is dominated by PIMCO’s Enhanced Short Maturity Strategy Fund (MINT). The expertise in fixed-income management and more competitive expense ratios will help these newcomers strip market share from existing offerings, although they may not achieve the same level of success as MINT in a short time period.
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Total estimated inflows to long-term mutual funds were $625 million for
the week ended Wednesday, November 16, according to the Investment Company Institute (ICI). This estimated total continues on a downward trajectory,
representing a 27% decrease from the $857 million intake during the prior week.
For the first time in quite awhile, domestic equity funds were not primarily
responsible for driving outflows. Despite domestic equity shedding $135 million
in net outflows, foreign equity was responsible for $1.1 billion in net outflows.
Moreover, hybrid funds experienced nearly $4.9 billion in net outflows. Once
again, bond funds experienced sales this week with taxable bond garnering
nearly $5.6 billion and municipal funds capturing $911 million in net inflows.
Source: Investment Company Institute
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1) Retirement Plan Fees Driven by Many Factors: Deloitte/ICI Study
ICI | 11/15/2011
Because… Fee disclosure regulations, the need for cost reduction, and fiduciary responsibilities are putting tremendous pressure on plan sponsors to frequently review plan fees. As more sponsors are approaching investment managers to renegotiate their contracts, asset managers need to be ready for open and candid discussions. In today’s tough environment, firms may have to cut advisory fees to maintain relationships or expand services and improve product performance to justify fees charged.
2) Legg Mason’s Bill Miller Will Exit Main Fund After It Falls Behind Peers
Bloomberg | 11/17/2011
Because… While the media focus has been on how Bill Miller ended his 30-year run as portfolio manager of the Value Trust Fund and whether his past market-beating streak could be attributed to luck or skills, it is more imperative for the firm to communicate with both retail and institutional investors if the manager change will affect the investment style and discipline as well as what organizational resources will be tapped to assist the new management team in performance turnaround efforts.
3) More Large Employers Freeze Defined Benefit Plans — Analysis
Pensions & Investments | 11/17/2011
Because…The freeze of DB plans reduces unpredictability for plan sponsors and changes their risk perception. Sponsors of frozen plans are more likely to revamp their investment strategies and shift asset allocations, which could have considerable implications for asset managers serving the DB market. Firms that provide LDI (liability-driven investment) solutions, have strong risk management capabilities, and play a consultative role will be able to capture more market share in this market segment.
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Total estimated inflows to long-term mutual funds were $836 million for
the week ended Wednesday, November 9, according to the Investment Company
Institute (ICI). This estimated total represents a 60% decrease from the $2.1
billion intake during the prior week. This overall decrease was primarily
driven by the $4.6 billion in net outflows from equity funds—comprised of
nearly $3.7 billion shed from domestic equity and $948 million from foreign
equity. Although hybrid funds garnered nearly $1.3 billion in net inflows, it
was a dramatic slip from its $2.3 billion gathered during the prior week. Bond
funds continued on a positive streak and bested its total from the prior week.
Taxable bond funds gathered $3.2 billion and municipal bond $1.0 billion,
representing a 32% and 56% increase from the prior week, respectively.
Source: Investment Company Institute
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1) ETFs Mimic Stock Pickers' Strategies
The Wall Street Journal | 11/7/2011
Because… We’ll be seeing more of these so-called strategy-based ETFs, which are in fact rules-based, enhanced-indexing ETFs. This type of ETFs incorporates elements of active management into traditional indexing, providing the potential for alpha generation. However, the complexity of stock-picking algorithms, relatively higher costs than those of traditional index-based funds, and level of transparency of multi-factor models may deter investors in the retail market.
2) Seventh Annual AllianceBernstein Defined Contribution Survey Finds Most Investors Understand Target-Date Funds -- but Expect Them to Provide Sufficient Retirement Income
PR Newswire | 11/7/2011
Because… The survey confirms that target date funds (TDFs) have continued to gain popularity, despite skepticism from some critics. TDF providers, as well as plan sponsors, should be given credit for investors’ satisfaction of the product and understanding of its basic features; however, they should not rest on their laurels. Besides enhancing the product design to address heightened market risks, TDF managers need to work diligently on decumulation solutions to quench investors’ thirst for a steady stream of retirement income.
3) Morgan Looking to Quadruple Alternative Assets to $300B
Money Management Executive | 11/9/2011
Because…Morgan Stanley Smith Barney is not in the minority to go after alternative assets. With a wave of new alternative fund launches, wider media coverage, and alternative specialists foraying into the retail space, alternative investments are creeping stealthily into the mainstream. The use of alternatives has become prevalent among institutional investors, including pension funds and sovereign wealth funds. Investment consultants are also enhancing their alternative investment capabilities as they anticipate a boost in alternative mandates.
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Total estimated inflows to long-term mutual funds were $2.22 billion for
the week ended Wednesday, November 2, according to the Investment Company
Institute (ICI). This marks the third consecutive week in the black, quite the
reversal from the opening week of October when overall net outflows totaled
nearly $11.2 billion. Taxable bond funds continued to drive sales with $2.4
billion; however, this represents a significant decrease from its $4.1 billion
intake during the prior week. Its counterpart, municipal bond funds, garnered
$648 million in net inflows. Hybrid funds have been attracting sales at a steady
clip, with $2.3 billion in net inflows. Once again, domestic equity shed nearly
$3.4 billion while foreign equity managed to capture $174 million in net
inflows, bringing the cumulative equity total to nearly $3.2 billion in net
outflows.
Source: Investment Company Institute
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1) T. Rowe Price Funds Now Available Without Transactions Fees on Schwab Mutual Fund OneSource for Advisors
T. Rowe Price | 10/28/2011
Because…The T. Rowe-Schwab deal is a win-win for all the parties. T. Rowe Price can gain access to Schwab’s 6,600 RIAs with $700 billion of combined assets. For Schwab, the addition of T. Rowe Price funds makes its OneSource platform at least equally competitive as other major NTF platforms. Finally, advisors ultimately benefit the most since they can access one of the top managers without paying any transaction fees.
2) Vanguard to Further Expand Its Index Fund Roster with Introduction of Two International Bond Funds and ETFs
Business Wire | 10/31/2011
Because…New funds will fill a gap in Vanguard’s product line, satisfy investor demand for international diversification, and bring greater competition to the international bond fund space. However, there are some caveats. First, while strategies of hedging currency exposure or investing only in U.S.dollar-denominated international bonds shield investors from currency risk, investors will not benefit from local currencies’ appreciation. Second, although both funds carry significantly lower expense ratios than category averages, they charge purchase fees, which may dampen investor returns.
3) Small Retirement Plans are Big Opportunity for Financial Professionals
Principal | 11/1/2011
Because…The small plan market is often ignored by investment firms. With industry giants including BlackRock, Vanguard, and T. Rowe Price pursuing small plans, more firms may begin to target this market segment. To better serve small plans, investment firms need to help plan sponsors keep up with the latest regulatory updates, explain fiduciary responsibilities in a clear and easy-to-understand manner, improve fee transparency, and incorporate plan demographics into the development of educational programs.
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Total estimated inflows to long-term mutual funds were $3.79 billion for the week ended Wednesday, October 26, according to the Investment Company Institute (ICI). The closing week of October experienced an impressive turnabout from the opening week when total net outflows were $11.2 billion. Once again, taxable bond funds drove sales with $4.2 billion, despite an 18% decrease from its intake during the prior week. Municipal bonds remain on a positive streak with $850 million in net inflows. Hybrid funds experienced its third week of net inflows, with $2.6 billion, representing a record total since collecting $2.0 billion during the week of September 7, 2011. On the other hand, equity funds continue in the red with outflows of nearly $3.9 billion. Domestic equity suffered $3.2 billion in outflows, while foreign stock slipped into negative territory with $680 million in outflows.
Source: Investment Company Institute
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Total estimated inflows to long-term mutual funds were $3.93 billion for the week ended Wednesday, October 19, according to the Investment Company Institute (ICI). This week’s inflows turn the tide of three consecutive weeks of outflows. Once again, taxable bond funds drove sales with $5.1 billion, while municipal bonds—which have not experienced outflows since the week of August 24—collected $548 million. On the other hand, equity funds continue to be battered with outflows of nearly $3.3 billion. Domestic equity suffered slightly less than $3.5 billion in outflows, while foreign stock gathered $177 million which represents a significant change from the $1.6 billion in outflows last week. Hybrid fund flows have been inconsistent for quite some time, but this week’s $1.6 billion in net inflows represents its best intake since collecting $2.0 billion during the week of September 7, 2011.
Source: Investment Company Institute
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1) Hispanics Still Believe in the American Dream, but Say Competing Financial Priorities Stand in the Way
MassMutual | 10/18/2011
Because… Ethnically diverse investor segments are underserved but present fast growing opportunities. Asset management firms have lagged behind banks and insurance companies in their multicultural efforts. Educational workshops with savings and investing tips, email newsletters with messages resonating with a particular group, collaboration with professional associations in ethnic communities, and support for ethnic group-focused financial advisors should help forge long-term relationships with people belonging to different cultural background.
2) ETF Congressional Hearing Testimonies
IndexUniverse.com | 10/19/2011
Because… The one hour and a half hearing touched upon controversial issues such as ETFs’ role in market volatility and classification of ETFs with different structures. The presence of executives from BlackRock, Nasdaq, and Kauffman Foundation (a starch opponent of ETFs) made the discussion very interesting. However, the discussion would have gotten more stimulating and engaging if a representative from a leveraged/inverse ETF sponsor had also been on the panel.
3) Bill Gross cops to 'stinker' of a year
InvestmentNews | 10/23/2011
Because…Star managers make bad calls too, but not every portfolio manager has the courage to publicly admit his or her poor judgment. Bill Gross has been very outspoken about his investment outlook and strategic moves. Although his “ Mea Culpa” cannot change the fact that his Total Return Fund underperformed this year, his candor and empathy could help retain shareholders who value the fund’s strong long-term track record and respect Mr. Gross as a leading fixed income manager.
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1) Natixis Survey: Faced with Market Volatility and Fearful of Losing Money, Investors Need Better Tools for Risk Management
Business Wire | 10/13/2011
Because… The last market crisis has taught investors a lesson - risk management is critical in capital preservation. It has also impelled asset managers to review and improve their risk management practices. An increased focus on risk management has brought about stronger risk oversight as well as new product solutions. When it comes to alternatives, it is important for fund managers to identify all relevant risk factors, determine risk premiums, and stick to predefined rules to cope with unexpected events.
2) Eaton Vance Corp. Announces Formation of Navigate Fund Solutions LLC
PR Newswire | 10/13/2011
Because… Exchange-traded managed funds (ETMFs) that Eaton Vance is proposing is claimed to combine features and benefits of both ETFs and traditional actively managed mutual funds. It would be interesting to watch whether this new investment vehicle will receive regulatory approval, backing from authorized participants, and investor acceptance. Many retail investors have yet to gain intimate knowledge of ETFs. Getting them to grasp more advanced concepts would be a tough nut to crack.
3) Nationwide Financial Supports National Save for Retirement Week
Business Wire | 10/17/2011
Because… Occasions such as National Save for Retirement Week provide financial firms with perfect opportunities to communicate with plan sponsors and participants and bring retirement savings and investing into focus. Besides Nationwide, ING and Great-West have also developed education campaigns to improve the public knowledge. Developing specialized campaigns and targeted marketing materials may consume lots of firm resources, but the efforts of helping plan participants will strengthen relationships with plan sponsors.
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Total estimated outflows into long-term mutual funds were $10.9 billion for the week ended Wednesday, October 5, according to the Investment Company Institute (ICI). Net outflows nearly doubled from approximately $5.7 billion during the prior week. Amid concerns about Greece and Europe’s banking sector, investors pulled their money from both equities and bonds—the latter suffering outflows for the first time since August 31, 2011. Taxable bond shed $6.2 billion, while domestic equity witnessed nearly $3.8 billion in net outflows. On the other hand, foreign equity and municipal bond managed to gather net inflows, with $498 million and $444 million, respectively.
Source: Investment Company Institute
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1) Transamerica Releases Findings From National Listening Tour With Third Party Administrators
Business Wire | 10/3/2011
Because… It is important for firms to forge a stronger alliance with third-party administrators as more business is coming through TPAs. Some companies that used to provide compliance administration and record-keeping as supplemental services have relinquished this business model and chosen to collaborate with specialized TPAs because the commitment of time, manpower, and money to developing the TPA business became a distraction from their focus on investment management and fund distribution.
2) That retirement calculator is lying to you and your clients
Investment News | 10/4/2011
Because… Many firms offer online calculators to help investors plan for their retirement. Choosing a conservative or more aggressive rate of return directly affects the estimate of the future value of retirement savings, so firms need to be judicious in their selection of the default rate. Providing a realistic range of rates to show possible outcomes of different scenarios, like what Vanguard does, is a more practical way for investors to set their retirement goal.
3) Mutual Fund Boards: How to Oversee Risks Better
Bank Investment Consultant | 10/5/2011
Because… It is uncertain whether a mutual fund board is a useful mechanism for monitoring risk management and how much impact a fund board can have on risk control measures. However, having an extra layer of oversight is always a positive factor in protecting investors from taking inappropriate risks. The best practices ICI and IBD outlined in their white paper should be followed by all fund board members.
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Total estimated outflows into long-term mutual funds were $5.5 billion for the week ended Wednesday, September 28, according to the Investment Company Institute (ICI). Despite four consecutive weeks of overall net inflows, this week’s turnabout was primarily due to the nearly $5.7 billion in outflows among domestic equity funds. Its foreign counterpart also experienced outflows, slipping from its $1.1 billion intake during the week of September 21 to outflows of approximately $802 million this week. Hybrid funds had been accumulating net flows at a steady clip since August 24 but witnessed outflows of nearly $2.6 billion. Seeking a safe haven, investors continued to pour assets into bond funds, with taxable bonds capturing $3.5 billion and municipal bond $80 million.
Source: Investment Company Institute
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1) Northern Trust Names Head of ETF Sales and Servicing
Business Wire | 9/27/2011
Because… This is Northern Trust’s second foray into the ETF space. From the launch of 17 ETFs dubbed NETs (Northern Exchange Traded Shares) in 2008 to the debut of four FlexShares ETFs last week, Northern Trust has shifted to a completely different strategy. The inclusion of fixed income products, established private client business, and expanded sales force could drive the ETF sales, but to be recognized as one of the top ETF providers, there is still a long way to go.
2) SEI Survey Shows Majority Of Wealthy Families Unprepared For Wealth Transfer
SEI | 9/27/2011
Because… The wealth transfer market presents tremendous opportunities for the financial services industry. While the lack of formal wealth transfer planning is common in high-net-worth families, preserving the assets inherited is another serious issue for those on the receiving end. Many asset management firms have recognized the need of helping investors with asset protection, but developing solutions most appropriate in the wealth transfer process has not become their primary focus at the moment.
3) Financial Professionals to Ramp up Retirement Income Planning Business
Principal | 9/28/2011
Because…Helping plan advisors build their retirement income planning business should be one of the priorities at financial services firms as a growing number of workers will switch the focus from asset accumulation to the generation of a steady stream of income after their retirement. To support plan advisors’ efforts, firms could create educational materials that help plan participants cope with complex income planning issues and develop income planning tools that assess income needs and evaluate the effectiveness of portfolio and withdrawal strategies.
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Total estimated inflows into long-term mutual funds were $386 million for the week ended Wednesday, September 21, according to the Investment Company Institute (ICI). This total represents an 88% decrease in total inflows from the prior week. Once again, bond funds continue to generate sales for the third consecutive week with nearly $1.8 billion in net inflows. Taxable bond funds continue to contribute the lion’s share with nearly $1.2 billion in net inflows. Equity funds continued on its downward trajectory, posting nearly $2.8 billion in net outflows, primarily driven by the $3.9 billion in outflows among domestic equity funds. For the fourth consecutive week, hybrid funds garnered sales, with $1.4 billion in net inflows—an attractive increase from the $551 million during the prior week.
Source: Investment Company Institute
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1) ETF investors are eager but not expert
MarketWatch | 9/22/2011
Because… ETFs’ rapid rise on the investment scene has not translated into increased investor knowledge according to the Schwab study. Product proliferation, niche strategies, and lack of guidance on portfolio construction can easily confuse and overwhelm investors. For ETF managers, simply throwing new products at the wall to see what sticks will not work. Providing adequate education on the ETF structure and advice on the effective use of ETFs will improve investor awareness and eventually help gather new assets.
2) ETF Opportunity Partners - Launch Announcement
Marketwire | 9/26/2011
Because… Lee Kranefuss is an ETF luminary and many of us are interested in what he is up to after leaving iShares. His visions of starting and growing iShares into the world’s largest ETF sponsor, the new firm’s unique strategic position of consolidating small ETF businesses as opposed to developing fund products, and the founders’ rich experience in broadening ETFs’ global reach should all bode well for this new venture.
3) 401(k) Participants Using Professional Investment Help Continue to Do Better Than Those Who Go It Alone
Aon Hewitt | 9/26/2011
Because… Despite the concrete value, the use of professional help among plan participants is still relatively low compared with the percentage of plan sponsors offering help. It is worth noting that in a study Mercer published last month, around 70% of sponsors indicated usage of investment advice or managed account is 10% or less. The higher percentage using professional help (30% by the end of 2010) from the Aon Hewitt and Financial Engines report may be caused by the inclusion of target date funds as an approach of getting professional help.
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Total estimated inflows into long-term mutual funds for the week ended Wednesday, September 14 were $2.13 billion according to the Investment Company Institute (ICI). Bond funds continue to generate sales with nearly $3.9 billion in net inflows. Once again, this was primarily driven by the $3.2 billion intake among taxable bond funds. After two consecutive weeks of gathering inflows, equity funds slid back into the red by posting nearly $2.0 billion in net outflows. Domestic equity dragged sales with $2.7 billion in net outflows versus the $666 million intake among foreign equity funds. For the third consecutive week, hybrid funds garnered sales, with $267 million in net inflows. However, this intake is a significant drop from the $1.7 billion in sales during the prior week.
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1) Fidelity names a new portfolio manager
Fidelity | 9/13/2011
Because…Portfolio manager changes are quite common at Fidelity, but replacing the manager of the famed Magellan Fund has drawn wide attention across the industry. Magellan, once the world’s largest fund, has suffered from underperformance and investor withdrawals. It will be interesting to watch whether the new skipper Jeff Feingold can right the ship while running four other funds, whether he can deliver strong performance for a fund much larger than those he currently manages, and whether his strategy of paring down international holdings would work.
2) Baucus Looks for Ways to Promote Retirement Savings through Tax Reform
Senate Finance Committee | 9/15/2011
Because… A complete overhaul of the retirement savings system is the last thing people want amid economic uncertainty. The DC plan may need some tweaking, but radical changes such as substituting the 401(k) tax deduction with a flat-rate tax-break could only disrupt the system that is already working. Educating workers and encouraging them to put more money into savings should take priority over any effort of changing tax code to increase federal revenues.
3) US Labor Department’s EBSA to re-propose rule on definition of a fiduciary
DOL | 9/19/2011
Because… Many in the industry had been concerned about the unintended consequences of the DOL proposed rule, including increased costs, complexity and confusion. The vocal opposition has prompted the agency to seek additional feedback before finalizing the rule. We hope with more thorough review and consideration revised provisions will be able to clarify the definition of fiduciary advice and better protect retirement plan participants and IRA owners from conflict of interest.
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Total estimated inflows into long-term mutual funds for the week ended Wednesday, September 7 reached $7.3 billion according to the Investment Company Institute (ICI). Bond funds gathered nearly $4.9 billion, posting its best sales week since July 13 when inflows totaled $5.3 billion. Taxable bond funds experienced quite a turnabout from $303 million in outflows last week to net flows of $4.4 billion. Foreign equity funds collected $1.8 billion, while its domestic counterpart continued in the red with $1.1 billion in net outflows. Hybrid funds continued to generate sales with $1.7 billion in net inflows.
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1) Old Mutual to sell $2.3 billion mutual fund business
Reuters | 9/7/2011
Because…Old Mutual’s sale of U.S. mutual fund business indicates firms are increasingly under pressure to focus on their core businesses. The competition in the retail mutual fund space is so fierce that firms lacking strong-performing funds, recognizable brand names, and established retail distribution channels may find it hard to increase market share. Foreign-based companies face more challenges in terms of strategic priorities for different markets and resource allocation.
2) Is There a Future for Retirement?
EBRI | 9/7/2011
Because… EBRI’s policy forum discussed hot issues such as retirement ages and adequacy of retirement plan design. Moreover, it pointed out an often-overlooked problem – “a substantial number of Americans will not be able to work longer than traditional retirement age even if they want to”. The uncertainty about the future demonstrates the need for financial services firms to make extra efforts to help workers maximize their retirement savings.
3) S&P Indices Announces Creation of SPIVA Awards Program
PR Newswire | 9/8/2011
Because… S&P’s awards program will bring the innovative use of indices into the spotlight. Asset managers, especially ETF providers, have been actively developing proprietary indices or rules-based models for their funds. Most recently, Russell, Invesco PowerShares, First Trust, and QuantShares have all launched or filed for enhanced-indexing ETFs. The movement toward passively managed investments will likely encourage more firms to capitalize on the increasing recognition of enhanced indexing and employ this approach as a way to achieve product differentiation.
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Despite only having $254.4 million in assets since its 1988 inception, Reynolds Blue Chip Growth ranks #1 over the 3- and 5-year time periods among its large growth peers and returned 39.2% for the year ended June 30, surpassing the S&P 500’s 2.9% annualized return over the same period. Expenses for the fund are on the high end with a 1.80% expense ratio compared to the 1.35% average for the category. The fund invests in a large basket of mid- and large-cap stocks and favors tech and dot com industry leaders.
http://www.investmentnews.com/article/20110901/FREE/110909999
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August ended on a positive note with $902 million of total estimated inflows into long-term mutual funds for the week ended Wednesday, August 31, according to the Investment Company Institute (ICI). This marks the first week that net flows were in the black since July 13, 2011, when inflows totaled $2.4 billion. Hybrid funds drove sales by capturing $1.1 billion followed in a distant second by Foreign Equity with $617 million in net inflows. Despite sales from Foreign Equity, redemptions totaling $748 million within Domestic Equity pushed the overall equity total into the red for the second consecutive week. Municipal Bond gathered $227 million for the week, reversing its streak of net outflows during the prior weeks in August. Taxable Bond continued to post net outflows, offsetting total bond flows to $76 million in net outflows.
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1) 401(k) Participants Who Use TDFs Overwhelmingly Stick With Them
EBRI | 8/30/2011
Because…The persistent use of TDFs is resulted from a confluence of factors. Plan sponsors, with the assistance of fund providers, have helped participants understand how to use TDFs effectively. TDF managers have revamped their asset allocation models and risk management approaches to make their funds better investment choices. Investors who have become more educated are no longer jumping at the first sign of trouble. Inertia is also a factor, especially for younger investors with lower account balances.
2) SEC Seeks Public Comment on Use of Derivatives by Mutual Funds and Other Investment Companies
SEC | 8/31/2011
Because… The regulator’s scrutiny may result in tougher restrictions on mutual funds’ use of derivatives. Currently the ’40 Act does not address some complicated issues of derivatives, which have been commonly utilized by mutual funds. While the SEC looks to ensure the amount of leverage in derivatives is appropriate, risk controls are effective, and investors are protected from taking on unnecessary risks, the use of innovative products should not be prohibited if fund managers provide adequate disclosure and investor education.
3) PIMCO Launches PIMCO Credit Absolute Return Fund
PIMCO | 8/31/2011
Because… The fact that PIMCO is adding another absolute return fund to its roster shows the popularity of the strategy in the bond fund world. With the success of PIMCO Unconstrained Bond Fund, portfolio manager Mark Kiesel’s dexterity in identifying credit opportunities and holding up in a market crisis, and PIMCO’s unparalleled reputation for managing fixed income assets, we expect the fund to have a good run.
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PIMCO has launched a go-anywhere bond fund, Credit Absolute Return, with access to hedge fund strategies including shorting and credit default swaps, according to Dow Jones Newswires. In effort to avoid the impact of potential rising interest rates in the U.S., there has been a flurry of go-anywhere bond fund activity. Unlike traditional bond funds, these funds can stray as far as necessary from the index they are measured against in order to generate the highest total return in any interest rate environment. Not surprisingly, PIMCO Unconstrained Bond, with nearly $18 billion in assets, is one of the most popular go-anywhere bond funds.
This launch comes on the heels of the bond giant’s push to diversify into equity funds. In April 2010, the firm launched EqS Pathfinder Fund, which invests primarily in global stocks but only has gained 0.4% through Aug. 30, less than the 0.89% gain for its benchmark, the MSCI World Index. In March 2011, the firm followed up with its EqS Emerging Markets Fund debut. This fund has posted a loss of 10.0% from inception through Aug. 30, compared with a loss of 8.04% for the benchmark MSCI Emerging Markets Index. The two funds collectively comprise slightly more than 0.1% of the firm’s assets.
Granted, the equity fund debuts have coincided with volatile markets worldwide, making it challenging for even the best of equity managers. However, Credit Absolute Return Fund may prove to be a less risky gamble.
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1) FINRA Clarifies Social Media Guidelines for Broker-Dealers
Financial Planning | 8/23/2011
Because… Despite concerns about compliance issues, a growing number of financial firms are using social media for investor engagement, marketing, branding, client services and education purposes. FINRA’s updated set of guidelines should help firms more effectively supervise the use of social media. For firms of all stripes, integrating social media into business strategies, formulating policies addressing the liability, and implementing systematic controls are necessary steps to expand social media presence.
2) ETF leader BlackRock files to run its own indexes
Reuters | 8/26/2011
Because… The plan to create its own indexes will give BlackRock more flexibility in product development and management. By constructing proprietary indexes, the firm can save substantial licensing fees. In addition, BlackRock can devise strategies that it believes is compelling. A handful of firms in the ETF industry are currently offering ETFs tracking in-house indexes, but BlackRock’s move could have a greater impact considering its sheer size.
3) Federated to enter the active ETF market
SEC Filings | 8/26/2011
Because… The filing indicates the arrival of another large fund firm on the active ETF scene. While Federated’s application did not reveal anything special about its future offerings, the firm’s prep for the entry suggests more traditional mutual fund firms are re-evaluating their business strategy and taking the ETF growth seriously. Federated had a failed attempt at target date ETF funds a couple of years ago, but this time, its experience in managing money market funds may help its initial fund (the Active Ultrashort Fixed Income ETF) take some market share away from PIMCO’s MINT.
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1) 11 HOLDRs To Be Closed
IndexUniverse.com | 8/15/2011
Because… The demise of HOLDRs (6 of 17 existing HOLDRs will be transferred to Van Eck and 11 will be terminated) manifests the theory of evolution by means of natural selection. HOLDRs, once considered revolutionary, have some apparent drawbacks, such as high concentration of individual stocks due to the lack of rebalancing and the requirement to trade in 100-share round lots. While HOLDRs may still appeal to some active traders who place sector bets on a few key players, most investors have found ETFs more innovative, flexible, and therefore more attractive.
2) Why the SEC shouldn’t push index funds
Reuters | 8/18/2011
Because… The rebuttal to David Swensen’s critique of the mutual fund industry points out that investors are mostly making rational decisions within a category and chasing performance by rotating between sectors (as opposed to within sectors). Reuters columnist Felix Salmon also asserts that pushing all individual investors into index funds would benefit hedge fund managers who Swensen invests in, which makes Swensen’s argument “look suspiciously self-serving”.
3) Surprise! S&P 500 Index no longer largest ETF
Investment News | 8/22/2011
Because… The fact that GLD ascended to the top spot and SPY assets dropped significantly in the last few weeks indicates that anxiety and concerns about another recession have pulled investors away from the stock market. As investors are seeking an alternative investment to preserve wealth and hedge against inflation, commodities like gold are viewed as a safe haven. However, GLD’s rapid rise and SPY’s quick plunge could be reversed if an oversold market signals buying opportunities.
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FUSE recently released a paper in conjunction with Keith Sloane titled Rep as Portfolio Manager Business.
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1) Tweaking 'Target' Lineups
The Wall Street Journal | 8/8/2011
Because… The trend of adopting custom target date funds (TDFs) will only accelerate as plan sponsors, especially large plans, look to tailor the funds to match their plan’s objectives and demographics. They also enjoy greater flexibility and control over underlying investment options. Discarding off-the-shelf TDFs will potentially benefit investment-only firms that do not provide bundled recordkeeping services. Customization also allows plan sponsors to select “best-in-class” managers to avoid manager-concentration risk.
2) The Mutual Fund Merry-Go-Round
The New York Times | 8/13/2011
Because… David Swensen’s criticism will likely rock the boat and upset many in the mutual fund industry. The Yale model was once considered a winning strategy for the new era and followed by disciples hoping to diversify into uncorrelated asset classes to improve returns. While we do not believe the entire fund industry has failed, there are some valid points that fund executives should address.
3) 'Go-anywhere' funds deliver as promised
Investment News | 8/14/2011
Because… The result will likely encourage more asset management firms to ride the wave of go-anywhere funds as both portfolio managers and investors appreciate the flexibility of this type of funds. However, unconstrained funds rely more heavily on portfolio managers’ judgment. Identifying an appropriate peer group is also a challenge. In addition, firms need to educate investors how these funds can fit into their portfolio.
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1) Few companies assess cultural issues despite the critical importance these play in M&A integration
Mercer | 8/4/2011
Because… Such issues as cultural adaptability and integration should merit more attention as the M&A activity picks up. Firms tend to spend more time on financial due diligence without proper consideration of cultural problems. While completely eliminating culture clash is impossible and impractical, firms involved in an M&A need to make an effort to share values and visions, address cultural differences early on, and improve communication to avoid confusions.
2) Volatility as an asset class
Investment News | 8/7/2011
Because… The recent market turbulence is making the emergence of volatility products more noticeable. A few firms have offered VIX products to hedge equity market tail risk, but we do not suggest product groups put efforts and resources into the development of this investment type at this stage. Since most firms do not have the expertise on these products and many investors do not know how to use them effectively, inappropriate marketing and sales could expose a firm to legal liability.
3) BlackRock Expands Index Fund Offerings for Defined Contribution Plans
Business Wire | 8/8/2011
Because… Plan sponsors are embracing index funds under the pressure of reducing costs and capturing market returns. However, index strategies are mostly used for large cap domestic equity options. For exposure to international equities and small cap U.S. equities, plan sponsors still look for active managers that can potentially control risks and generate alpha. The DC market is presenting opportunities for both index providers and active managers, so firms need to explore and identify the most attractive market segments to pursue.
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The following is an Q&A with Jason Heinhorst that was featured on Ignites on July 20.
Q: What are the chief ways that ETFs are changing the traditional mutual fund business? What could this all mean for mutual funds in the long term?
Principal, boutique firm, Northeast
A: It is true that in some ways exchange-traded funds (ETFs) have changed the game for traditional mutual funds. The flexibility and attractive cost structure of ETFs, for example, has forced actively managed ’40 Act funds to adjust in order to remain competitive. However, mutual fund assets still dwarf ETF assets, and reports of the death of active management and the traditional mutual fund are greatly exaggerated.
I believe that the following shifts within the traditional mutual fund business result more from a broader debate over active versus passive investment strategies as opposed to any competitive threat from ETFs:
Core holdings. Passive products dominate “core” mutual funds: large-, mid- and small-cap. Some advisors have looked to passive products for core holdings and are comfortable with a passive product to fill that need. This trend has resulted in passive products accounting for more than 50% of assets under management (AUM) in the core space. Only asset managers with massive resources and significant scale will look to compete in this space, except for those funds with hyper-competitive performance.
Marketing. Active managers need to justify incremental fees by beating the performance of passive products, an obvious challenge for those funds marketing active products. ETFs are creating marketing challenges for active managers, who are increasingly under pressure to publicly justify why their fees are higher. I believe that active managers should focus on marketing their investment process, since that will be the key differentiator. It is important to highlight how the investment process is repeatable and will produce risk-adjusted performance in excess of the benchmark.
Due diligence. In lockstep, due diligence has become much more stringent across the board, and active mutual funds now have a greater need to emphasize the value added by their approach. In the retail channels, more institutional processes are being utilized by both research teams and large registered investment advisors (RIAs). Therefore, wholesalers and, more importantly, the dedicated resource providers servicing the due-diligence groups need to have a skill set that rivals an institutional salesperson’s. Chartered financial analysts (CFAs) who can speak the language of research groups are becoming the prerequisite to servicing this channel. Fund firms should call on these sales professionals to explain how their investment process differentiates their product slate from rivals, whether active or passive.
Product development. This is more of an ancillary shift, but there are areas where passive products, such as an ETF or a mutual fund, gain traction in niche or emerging investment categories, such as Asian local debt or managed futures. The relative ease of launching an ETF gives ETF providers an advantage when it comes to meeting new and unmet needs of investors. In order to compete more effectively, product professionals for active managers should be constantly monitoring the flows into new and emerging investment classes of passive products to identify potential opportunities that might exist for an actively managed product.
Focus. ETFs have made validating the benefits of active management more challenging for mutual fund firms through the introduction of broad access to low-cost passive investment strategies across virtually all asset classes and investment strategies. Therefore, asset managers need to be more efficient at segmenting advisors in order to capitalize on the value proposition of active management. Namely, they should target those inclined to use active managers, servicing distribution partners both from a business and due-diligence perspective. Other keys include managing the product suite with a true product management function and committing to a brand strategy that resonates throughout the organization.
Passive ETFs have experienced explosive growth; however, the business continues to be highly concentrated among a handful of players. It is true that the impact of ETFs and passive products has been significant. However, since mutual fund assets are still eight times larger than ETF assets, we believe that the death of active management and the traditional mutual fund has been a manufactured trend, not the real deal.
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1) Boomers not interested in rocking chair retirement
Investment News | 7/12/2011
Because…We believe boomers in reality are forced to delay their retirement. For those that are not financially ready, “rocking chair retirement” is just not an option no matter how they personally feel. Their savings are insufficient to support their expenses and desired lifestyle in retirement. These individuals expect working through retirement to help meet their financial needs, but weak economic conditions and grim job market may prove their expectation unrealistic.
2) Schwab Sees Continued Growth Among Independent Recordkeeper Clients
401khelpcenter.com | 7/13/2011
Because…The demand for pricing transparency, best-in-class investment managers, and customized solutions is driving plan sponsors to look for independent recordkeepers. These firms focus on recordkeeping and do not compete for advisory business, thus no conflict of interest exists. Although large recordkeepers with proprietary investment products still hold the majority of DC plan assets, independent recordkeepers that offer competitive pricing structure, simplified procedures, timely and effective support, and quality participant reports will win more business than ever before.
3) ProShares Launches ETF as Alternative to Hedge Funds
ProShares | 7/14/2011
Because…The concept of providing hedge fund characteristics without investing in hedge funds seems attractive, but whether the fund can truly mimic the risk/return profile of hedge funds remains to be seen. By using a factor-based model to synthetically replicate the hedge fund performance, the fund is offering retail investors access to hedge-like strategies at a much lower cost. ProShares is joining IndexIQ in democratizing hedge investing and we expect more ETF sponsors to jump on the bandwagon.
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1) The Average Expense Ratio Incurred by 401(k) Investors in Stock Funds Declined in 2010
ICI | 6/29/2011
Because…The use of stock funds with lower expense ratios in 401(k) plans reveals that plan sponsors are paying more attention to cost reduction and wielding more power in price negotiations. For asset management firms, the declined fee revenue means they will have to diversify product sales, deliver more attractive solutions, enhance plan support with insights, and strengthen relationships with retirement plan intermediaries in order to expand the retirement business.
2) Auto enrollment in DC plans has unanticipated side effect
Pensions & Investments | 7/11/2011
Because… Despite the “unanticipated side effect”, we believe auto enrollment does more good than harm. It helps increase participation rates, as the lack of investment skills and retirement planning motivation often leads workers to delay participation in retirement plans. However, the auto-escalation feature is better to be provided along with the auto enrollment. Employees also need to understand the presence of these auto features will not guarantee a nest egg sufficient to meet all retirement needs.
3) Asset Managers Increase Profitability But Still Face Challenges
Financial Planning | 7/11/2011
Because…Asset management remains to be one of the few industries that have maintained high profit margins regardless of economic conditions. In addition to the challenges discussed in the BCG report, investors’ changing behaviors, distrust of investment firms, keen competition from peer groups, and technological advances are also issues that asset managers have to grapple with.
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1) Strategic Income Management Announces New Asset Allocation Mutual Fund Lineup
Marketwire | 6/21/2011
Because… The ETF growth has spurred the development of investment strategies that build on individual ETFs and seek to offer more complete portfolio solutions. While these funds provide investors with diversification, professional guidance, and convenience, they tend to charge high fees. Two layers of fees (i.e. management fees on top of underlying fund expenses) are likely to deter investors from putting money into this type of funds.
2) Forum Investment Advisors seeks exemption to launch actively managed ETFs
SEC Filings | 6/24/2011
Because… Another firm is testing the waters just as PowerShares is shutting down two active ETFs. The lack of scale, a proven track record, and distinct competitive advantages would be major issues for firms entering the field. If large asset managers, such as JP Morgan and T Rowe, launch their own active ETFs, it would be harder for small firms without the same brand power to generate significant interest.
3) Brinker Capital Introduces ETFs to Defined Contribution Retirement Plans
Business Wire | 6/27/2011
Because… With more firms incorporating ETFs into their retirement portfolios, we are seeing the trend of offering ETFs in 401(k) plans is gaining ground. The technological barrier that prevented ETFs from getting into DC plans has largely been cleared. We believe the use of ETFs in retirement plans will accelerate, driven by the demand for low-cost options, plan sponsors’ fiduciary concerns, new rules on fee transparency, and brokerage firms’ elimination of trading commissions.
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1) No free lunch
Employee Benefit Adviser | 6/15/2011
Because…Particpants’ ignorance of plan fees is disturbing. Inadequate fee disclosure and poor communication lead many employees to believe they do not bear plan costs. The DOL rules on fee transparency and disclosure should help dispel the misconceptions. Meanwhile, plan sponsors and service providers need to proactively assist plan participants in understanding the plan fee structure so that they do not feel overwhelmed by detailed fee information.
2) Eaton Vance Launches Municipal Opportunities Fund
PR Newswire | 6/15/2011
Because… new fund launches from Eaton Vance, Nuveen and Fidelity make one wonder if the muni market is on the road to recovery. The asset class experienced net redemptions of $23 billion in the first five months of this year and $49 billion since November. Speculations about municipal defaults and overstated muni bond risks precipitated investor withdrawals, but the latest offerings suggest the worst may be over and a market turnaround may create a buying opportunity.
3) Schwab Finds Majority of Older Americans Confident in Retirement Preparedness
Business Wire | 6/15/2011
Because… Schwab’s findings seem contradictory to those of prior surveys which showed the overall retirement confidence has dropped to a very low level. Many workers put retirement savings on the back burner and expect to delay the retirement age to generate retirement income. Financial services firms need to motivate these people by providing tools that define savings goals and equipping them with investment knowledge to alleviate their fear for making financial decisions.
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1) Russell continues to expand client team supporting defined contribution intermediaries
Russell | 6/13/2011
Because… The move to open architecture and the search for “best-in-class” investment managers should bring tremendous opportunities to asset management firms that are not recordkeepers. Many firms, like Russell, have formed dedicated teams to focus exclusively on the DCIO market. The ability to provide a broad array of top performing funds with pricing flexibility, value-added educational programs, as well as business support that helps grow client base can play a key role in the competition.
2) Neuberger Berman Introduces Global Allocation Fund
Business Wire | 6/13/2011
Because… Global allocation funds have been generating lots of interest. The category garnered $4.1 billion in May and $20.8 billion in the first five months of the year, ranking #3 and #2 for May and YTD inflows, respectively, among all long-term mutual fund categories. With the flexibility to employ different global allocation strategies, product providers need to demonstrate the investment process and the use in portfolio construction to ensure thorough comprehension.
3) Global X Funds SuperDividend ETF (SDIV) Attracts Huge Trading Volume
PR Newswire | 6/13/2011
Because…The high trading volume is one indicator that old-fashioned dividend-paying funds are making a comeback. It’s time for firms that offer dividend-themed funds or invest in dividend-paying stocks in a Large Value portfolio to craft a marketing message to catch investors’ attention. Talking points in the investor communication could include portfolio management focus (e.g. attractive dividends with/without earnings potential), investment approach (e.g. criteria for dropping stocks with reduced or eliminated dividends), and fund positioning in the asset mix.
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1) J.P. Morgan Launches Online Community for Plan Sponsors
Planadviser | 6/2/2011
Because… We believe an online community has advantages over some of more popular social media tools. The invitation-only site allows a firm to easily gather pertinent information, unlike web sites with a wider audience where useful information gets buried underneath countless irrelevant subjects. An in-house application, as opposed to those from a third-party, also gives a firm more flexibility and control as it can change features and settings based on user requests.
2) Principal-protected notes don't always protect principal, regulators warn
Investment News | 6/3/2011
Because… The structured products industry is burgeoning with the best-ever first quarter sales, as reported by Structured Products Association. While these alternative products can meet special investor needs, they have always been considered areas of concern by regulators. The complexity of this product type makes extensive education and training absolutely critical in the product distribution process as the market, credit, liquidity, legal and reputation risks associated with structured products can be much higher than those of other investment instruments.
3) Putnam Investments Creates iPhone App to Enable Shoppers to ‘Impulse Save’ for Retirement
Business Wire | 6/6/2011
Because… The new app helps people curb impulse spending and connects today’s savings with tomorrow’s retirement income. Putnam expects to offer the tool to differentiate itself from the competition in the retirement income space, but the success of this app will depend upon the usage rate of iPhone among plan participants and the likelihood of changing their spending habits.
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1) Investment Managers Face Heightened Scrutiny
Registered Rep | 5/24/2011
Because… Investment managers need to be prepared for the increased scrutiny of their organization and people. Business sustainability and manager turnover has already been an integral part in the manager due diligence process, but the close scrutiny that even delves into personal lives should put every manager on guard. Those who do not embrace enhanced transparency or pay no heed to such intense oversight will be most likely to lose business.
2) Morgan Stanley Smith Barney to shed reps' social media shackles
Investment News | 5/25/2011
Because… More brokerages may follow suit and allow communication through the social media channel in order not to be left behind. While social media can be helpful for building loyalty and long-term relationships, advisors should not rely heavily on social media tools and neglect the human touch. Many investors still prefer physical interaction to virtual connection for their financial matters.
3) Turner to liquidate another quant fund
SEC Filings | 5/27/2011
Because… Fund closures from firms such as Turner and RidgeWorth indicate the challenges quant funds face. Quant models, built with historical data, may not work well when new economic paradigms emerge. Their algorithms can be too sophisticated for the sales force to explain in a way that average investors can grasp. Despite all the difficulties, quant strategies will continue to survive as an effective tool for stock selection and risk management.
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1) 20-Year-Old 401(k) Participants Have 85% Exposure to Equities: Vanguard
Money Management Executive | 5/19/2011
Because… One of Vanguard’s survey findings suggests that “equity risk-taking by participants will be increasingly the result of plan design and menu choices, and less a function of participant reaction to current market conditions”. This highlights an important role financial services firms can play in helping plan sponsors enhance plan design, increase automation, and improve investment choices. For target date fund providers, glidepath construction that adequately meets requirements of most plans with the flexibility of customization may offer more investors a better chance to achieve their retirement savings goals.
2) National Survey of Employees and Employers on Defined Contribution Retirement Plans
BlackRock | 5/19/2011
Because… The disconnects between employee expectations and employer attitudes about post-retirement help deserve grave attention. The diminishing access to social security and DB plan benefits has led to greater reliance on DC plans for retirement security. While workers are in dire need of guidance, employers are reluctant to provide the support due to regulatory ambiguity. It is imperative for industry groups to focus more on retirement income and spending issues.
3) Northern Trust Launches Emerging Manager Funds for Institutional Investors
Business Wire | 5/19/2011
Because… These collective funds are special in that they are run by multiple emerging managers. Studies have shown that smaller investment managers tend to deliver better performance compared with their more-established counterparts. Emerging managers are generally more motivated, can execute their best ideas without conforming to group think, and have the flexibility to adjust quickly to changing market conditions. However, partnering with emerging managers may entail additional risks.
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1) Vanguard Slashes Minimum Investments on 27 Funds
Morningstar | 5/10/2011
Because… Vanguard’s move should provide young investors and others with limited investable assets with an easier access to its funds. Vanguard attracted $35.7 billion into its long-term mutual funds and ETFs in the first four months this year, bringing its total long-term assets to $1.5 trillion. The sheer scale should enable the firm to service small accounts. Encouraging small investors to start investing could ultimately foster long-term relationships with these individuals as they grow their assets over time.
2) 'Forward' Thinking Fund Firms Embark on an Advisor Road Show
The Mutual Fund Wire | 5/12/2011
Because… These firms have gone from competition to collaboration with a shared mission of educating advisors and the media. The joint effort by both large fund companies and niche players demonstrates that traditional and alternative asset managers are both looking to grow market share in this space. Introducing their unique offerings on the road show also sends a message that alternative funds can come in many different flavors.
3) The Principal celebrates National Small Business Week with new tools
The Principal | 5/16/2011
Because…We wonder how many financial firms have planned for the celebration of the National Small Business Week. Occasions like this provide an opportunity for firms to connect with their small business clients. Some firms have started targeting the small business segment by developing products that suit the needs of small businesses while lowering costs for their employees. Creating targeted educational materials for the special week would further deepen relationships with this group of clients.
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1) Lord Abbett Introduces Inflation Focused Fund
PR Newswire | 5/2/2011
Because … Investor concerns about inflation have prompted asset management firms to launch products that hedge against inflation. Inflation-protected mutual funds and ETFs have raised $2.5 billion in the first quarter after attracting $8.6 billion last year. Strong retail demand, combined with the greater use by institutional channels (e.g. target date funds, 529 funds, and other asset allocation funds-of-funds increasingly add inflation-fighting funds to their roster), should continue to drive fast growth of this fund category.
2) Pioneer Has Something in Common with OppFunds, Franklin
MFWire | 5/3/2011
Because… Public relations have often been ignored, despite being a powerful tool to build brand awareness, broaden market reach, and strengthen credibility. Some firms have been doing an excellent job of setting public relations strategies and communicating to the public in an effective way(such as PIMCO, Eaton Vance, John Hancock, and MassMutual), more asset managers need to work harder with PR professionals to exploit all possible opportunities to increase visibility.
3) Morningstar Announces New Fund Categories to Better Classify Alternative Investments
Morningstar | 5/9/2011
Because… The addition of 10 new categories is a proof that a growing number of asset management firms are looking to ride the alternative investment wave. However, whether investors will be gravitating toward alternative funds will depend on investment management skills, market positioning, portfolio transparency and liquidity, and most importantly, enhanced educational initiatives. It is also worth noting that funds in the seven Trading categories will not receive a Morningstar Rating.
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1) Hedge Funds are a Mystery to Most Investors
PR Newswire | 4/11/2011
Because…This survey finding seems discouraging to firms that offer hedge-like mutual funds, but it points to the need for better investor education. An increasing number of mutual fund firms are bringing hedge strategies to the market, hoping average investors could take advantage of opportunities that were available only to affluent investors. It is essential for these firms to ensure investors have a good understanding of their strategies.
2) Advisors' Number One Challenge Is Bringing on New Clients, but This Can Be Fixed
AdvisorOne | 4/14/2011
Because…Advisor research like this provides some direction for asset management firms on how to support advisors and address their needs. While asset management firms have been developing practice management tools and resources to help advisors identify prospects and turn prospect into clients, they need to emphasize that the quality of advice and overall services is a determining factor of client acquisition.
3) Grail buy would make Ameriprise big-time ETF player
Investment News | 4/14/2011
Because… The deal indicates the end of a journey for an active ETF pioneer. Ameriprise’s network of over 10,000 financial advisors and marketing strength of a large company should boost distribution of the fledgling active ETFs, but whether Columbia can make a successful ETF run without hurting its mutual fund business and whether Columbia’s mutual fund track record would generate much investor interest remain to be seen.
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1) Deutsche's DWS aims to triple funds raised in Asia in 5-7 years
Reuters | 4/5/2011
Because…Foreign expansion has become a strategic priority for firms faced with stagnant domestic demand. Asia, in particular, has grown to be a target market for aspiring western firms because of Asian countries’ fast GDP growth, booming economies and an increasing number of wealthy investors. However, opportunities do not necessarily translate into success. Firms need to understand local cultures and build lasting relationships in order to achieve their goal.
2) Most Boomers Still Dependent On Social Security For Retirement
On Wall Street | 4/6/2011
Because…The reliance on social security results from the deep distrust of financial institutions as well as investors’ inability to manage retirement savings. While social security is still a valuable source of retirement income, it will not be enough to secure a comfortable lifestyle in retirement. It is vital for financial firms to restore public confidence and teach people how to evaluate investment opportunities and make sound asset allocation decisions.
3) Dreyfus Launches Dreyfus Global Dynamic Bond Fund
PR Newswire | 4/6/2011
Because… Unconstrained bond funds are in vogue. Morningstar estimated this group of funds grew more than 260% over the past 12 months, with assets of 20 or so funds surging to about $44.5 billion as of February 2011. While fund managers enjoy the flexibility of investing in any part of the bond universe, the pursuit of alpha in credit markets and frequent sector rotation may make these funds more volatile than traditional bond offerings.
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A quick blog about (click here for the article) a study conducted by James B. Oldroyd of Sungkyunkwan University in South Korea. The research looked at 2,241 U.S. firms and Oldroyd concluded that companies that contact potential customers within an hour of receiving queries are nearly seven times more likely to "have meaningful conversations with key decision makers as firms that try to contact prospects even an hour later."
The message is simple: strive to be the best in the industry at service and response times. Good is not good enough.
Source: The Short Life of Online Sales Leads
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Attached is a link to a report by Kathy Freeman Company called "The Shifting Balance of Power - Resuming the War on Talent."
Click here for the report.
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1) ETFs to Top Second Trillion in Three Years
Bank Investment Consultant | 3/29/2011
Because… Many in the mutual fund industry are concerned about market cannibalization if ETFs grow as fast as predicted. A few factors could act as catalysts to trigger the rapid growth of the ETF industry: a faster SEC review and approval process, accelerated launches by major fund companies, greater adoption by retirement plans, and wider use of ETFs in asset allocation strategies.
2) BlackRock and Mizuho Sign Business Alliance Agreement
BlackRock | 3/31/2011
Because… we’ve seen more companies are trying to benefit from strategic business alliances. Besides BlackRock, SSgA tapped Celfin Capital to promote SPDR ETFs in the Andean region. Leveraging partners’ local market knowledge and relationships should help firms expand global footprint and penetrate markets where they lack distribution prowess.
3) Columbia Management Launches Absolute Return Funds
Business Wire | 4/4/2011
Because…a growing number of asset managers have jumped on the bandwagon and rolled out absolute return funds. These managers need to address two key issues: whether their funds can deliver attractive returns regardless of market conditions and how they would explain to confused investors if the funds fail to generate positive returns in all kinds of markets.
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FUSE Trend #10 – In addition to Putnam and DWS Investments, which we discussed in our FUSE Trend #9, another three firms will be rewarded for embracing the importance of brand. The brand strategy will flow consistently throughout their entire organizations and the benefits will directly impact the top and bottom lines of these organizations with improved staff and asset retention, higher sales, and a differentiated marketplace position. Some of the common characteristics of these firms will be clear identity/culture, elevated role of marketing, belief in the value of PR, focus on staff development and well articulated goals and objectives.
In many ways, we clearly have tongue in cheek for this trend; however, it illustrates our view on brand. Brand is not awareness of a logo or tagline, but is instead the culture of the organization and it must be embraced at every level. Brand must be consistent and it must be measured at least annually. Asset management has long been a business driven by sales organizations, and therefore has had a cultural focus on sales, while marketing has played second fiddle, primarily serving as sales support.
The problem with having a sales mentality that permeates through an organization is that it can be a little haphazard and focused on the short term, which can make it difficult to execute a consistent brand strategy. In the mutual fund industry, even a firm that is very secure in its own skin may stray from its brand due to numerous influences, including challenging market conditions, an out-of-favor discipline, popular trends, and the list goes on. That’s not to say that firms should never revisit their branding strategies, but fluctuating factors should not the impetus behind deviating from a proven brand.
In our opinion, organizations need a brand steward, and the most logical place to house that function is within marketing. Marketing is uniquely positioned to help ensure that the brand is consistently applied both internally and externally. That said, in order for marketing to be successful in cementing the brand throughout the organization and marketplace, it must possess sufficient organizational influence and a certain amount of say when it comes to implementing ideas that may or may not be consistent with the firm’s brand.
There are thousands of options for advisors and home offices to choose from for investment products. Passive products are taking incremental share every year from active managers. Performance is and should be the focus of every organization; however, building a strong brand to complement a solid investment process will produce the strongest organizations.
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1) The 2011 Retirement Confidence Survey: Confidence Drops to Record Lows, Reflecting “the New Normal”
EBRI | 3/15/2011
Because… The lack of retirement confidence, despite the market recovery, is quite worrisome. It is financial services firms’ responsibility to help Americans regain the confidence. Many firms have developed programs and tools to educate investors, but the decline in confidence to a record low level indicates that such efforts have not had a profound impact in changing investors’ mentality and outlook on retirement reality.
2) Putting Mutual Fund Fees in Context
Morningstar | 3/22/2011
Because… The new data point will elevate the importance of fees in the fund selection process. With investors potentially moving assets to lower-cost funds, asset management firms will be forced to constantly monitor their pricing structure compared to the competition and reduce fund fees whenever possible. The pressure on fee reduction will push firms to look for more profitable product opportunities.
3) Janus Active ETFs Would Be Transparent
IndexUniverse.com | 3/28/2011
Because… Transparency has been a primary concern for asset managers that expect to develop actively managed ETFs. Equity managers have yet to identify a truly innovative solution that addresses the disclosure issues, and the SEC will be unlikely to waive the daily disclosure requirement considering transparency is one of the key features of ETFs.
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FUSE Trend #9 – DWS and Putnam are positioned for a turnaround, as both organizations transition from extended periods of annual net outflows to net inflows in 2011.
Two thousand and eleven should be the year of the comeback—or, more accurately, the recognition of comebacks that have been a long time in the making. Two firms, in particular, embody the notion of a comeback story, Putnam and DWS Investments.
Once one of the industry’s most respected companies, Putnam has been in net redemptions for the better part of the last decade. However, the firm’s fortune began to change in 2008 with the hiring of Bob Reynolds as president and CEO. Reynolds, who is a very visible presence in the industry, has done a lot to change both Putnam’s external image, as well as its internal culture. In addition to making great performance strides, Putnam is now regarded for its thoughtful product innovation, which began with the launch of its absolute return series in 2009. Putnam was ahead of the curve in developing this strategy and has since become the brand most associated with it. The firm has also been among the most aggressive in using social media to bring its message to advisors and investors.
DWS Investments, which is the product of Deutsche Bank’s acquisition of Scudder, is now a recognizable name with its own brand identity, but getting to this point was a long time coming. Deutsche acquired Scudder in 2002, and for several years, the combined company suffered from culture clashes, significant manager turnover, and sub-par performance. In 2006, the firm rebranded to DWS Scudder, and in 2008, it dropped Scudder altogether to become DWS Investments. Over the last couple of years, DWS has consolidated its lineup, improved the consistency of its management, and delivered more competitive performance. The firm has also upgraded its distribution effort, expanding its external sales force by 11% in 2010.
For Putnam and DWS, the financial crisis provided an opportunity to press the reset button, and both have capitalized on it to recreate their brands. After years of net outflows, the two firms are finally poised to enter sales positive territory in 2011.
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FUSE Trend #8 - Janus, MFS, and Nuveen are among the firms that have been producing exceptional investment performance across a broad array of equity products and appear poised to rank among the top-selling organizations in 2011. In addition, look for Dreyfus to emerge as a strong beneficiary of emerging markets interest, Natixis to have a breakout year selling a number of alternative strategy funds, and Pioneer to again be a go-to shop for high yield and strategic income funds.
Thematically, we believe 2011 will be a highly positive year, particularly for equity-oriented products; however, it may also prove to be a bit turbulent as advisors and investors seek to navigate rapidly changing market and world circumstances.. While international equity products will continue to attract sales for the duration of 2011, where the money flows may shift throughout the year. Funds that concentrate on developed markets will be impacted by the natural disasters in Japan and the precarious state of the country’s nuclear power plant (as an indication of the level of exposure to Japanese equities, the MSCI EAFE Index had an allocation of 22% to Japan as of year-end 2010). At the same time, the contagious European sovereign debt crisis continues weigh on those regions.
Circumstances in the developed world may once again cause investors to turn their attention toward emerging markets, but situations in these areas are no less complicated. Developing markets, including the BRIC nations, are struggling to manage growth and control inflation, while some frontier markets are the subjects of continuing unrest in the Middle East.
Although the U.S. economic recovery is still in its infancy, a number of factors are likely to push investors toward domestic equity funds. First, global events may cause some investors to stick closer to home, and second, the risk of rising interest rates and inflation, as well as continuing headline risk in the municipal bond market, will divert more sales away from fixed income and toward equities. This should make 2011 a highly positive net sales year for domestic equities after a decade of modest or flat sales growth, and represent a refreshing change for firms that have become accustomed to competing in a take-away, as opposed to a growth, business.
The final wildcard will be alternative products, including long-short and commodity funds, as these asset classes continue to play to a variety of current themes, including the desire for more consistent returns during periods of heightened market volatility, and growing demand for strategies to combat rising inflation. Though equity funds, on the whole should experience increased sales, as we saw in the fixed-income market over the last couple of years, equity products with global mandates and wide investment latitude are likely to be the biggest winners as investors shift their thinking and realign their portfolios to weather these tumultuous times.
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FUSE Trend # 7 - The transition of flows to equity products will boost ETF sales as: (1) there is a wide array of high-quality equity ETFs available and, unlike in the fixed income boom, ETF product development will not have to catch up with demand, and (2) tactical asset allocation and core-satellite investing support growing use of passive ETFs.
During the first two months of 2011, we have seen a transition of flows to equity products but ETF sales have remained flat compared to 2010. YTD flows of ETFs totaled $14 billion through February and net sales during February were only $3 billion. Conversely, mutual funds captured net inflows of $59 billion during the first two months of 2011. Domestic equity and taxable bond funds were the top two categories with net intakes of $26 billion and $23 billion, respectively.
Despite tepid net flows during the first two months of the year, we still believe ETFs will benefit from sales momentum shifting back to equities for the first time in several years. Among the reasons are:
- Fee sensitivity – Beta products do not command active product fees; therefore, advisors and professional buyers will utilize ETFs for equity exposure in certain instances. Advisors have become highly sensitive to fees and they are using ETFs in order to reduce costs within their client portfolios.
- Product availability – There are hundreds of equity ETFs providing exposure to any asset class that a direct investor, advisor, and/or home office would want access to for an asset allocation process.
- Tactical management – Tactical asset allocation continues to be implemented at the home-office/research-director and advisor levels. ETFs are ideally suited for short- or intermediate-term market exposure as positions can be efficiently implemented or eliminated. For these reasons and a number of others, we anticipate ETF net sales to be highly positive once again.
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1) Metlife and Pimco Collaborate to Provide Financial Advisors with Unique Retirement Income Solution
MetLife | 3/1/2011
Because… The marketing collaboration between PIMCO and MetLife indicates that asset management firms and insurance companies are moving from competition to cooperation. Asset managers have competed with insurers in the fight for retirement money, but combined efforts that integrate investment management and insurance perspectives into advisor education and leverage each other’s strengths should open up a lot of new business potential for both parties.
2) Hedge fund assets tipped to grow over 25% this year to $2.5 trillion
Hedge Fund Review | 3/8/2011
Because… Increased allocations to hedge funds, more direct investments in single-manager funds, and greater appetite for mid-sized as well as early stage funds all revealed that investors, particularly institutional investors, are ready to take heightened risks. However, this sentiment shift will not translate into inflows for all hedge managers. A select group with easy-to-understand strategies, enhanced liquidity and transparency, and improved risk control will attract more assets.
3) DB Versus DC Plan Investment Returns: The 2008-2009 Update
Towers Watson | 3/9/2011
Because… The research that shows DC plans outperformed DB plans in 2009 seems encouraging for DC plan participants, but one-year outperformance does not put DC plans in an advantageous position in terms of long-term asset accumulation. Higher costs and lack of professional guidance remain to be challenges for these plans. Asset management firms need to work with DC plan sponsors to identify ways to enhance investment offerings and reduce costs.
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1) Schwab changes fee structure on fund platform
Investment News | 2/20/2011
Because… Schwab’s move will have a direct impact on asset managers, investors, and its competitors. Large asset managers that have a wide range of funds on the platform will have to shoulder the burden of the fee hike initially and then determine whether to pass the costs on to investors. Meanwhile, Schwab’s competitors may want to examine their own pricing strategies and decide whether to make adjustments accordingly.
2) More Effective Practice Management Tools Needed
Planadviser | 2/22/2011
Because… Asset management firms have scrambled to develop practice management tools aiming to help advisors improve productivity and profitability, but only those programs that are practical, easy to implement, and delivered in an effective way can truly engage and empower advisors. Only firms that combine innovative practice management solutions with adequate training and support will be rewarded with new business.
3) Targeting Fees in Target-Date Funds
MarketWatch | 2/25/2011
Because…The tighter scrutiny of fees could bring about fundamental changes to the target date fund structure, though the shift may be slow and incremental at an early stage. More plan sponsors may reduce dependence on their recordkeeper’s products and become more open to non-proprietary funds offered by “best-in-class” managers. The increasing use of passive strategies and alternative investment vehicles (e.g. collective trusts) should also lower target date fund fees for plan participants.
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FUSE Trend # 6 - we anticipate sales to be up substantially in 2011, as net flows of mutual funds will approach $300 billion compared to approximately $250 billion in 2010. At the broad objective level:
- We believe 2011 will be the best period of net sales for domestic equity mutual funds in six years, as a strong fourth quarter and two consecutive years of double digit returns helps restore confidence;
- Non-US equity will continue its strong sales run and capture the largest share of flows for mutual funds;
- Fixed-income product flows will be positive once again, but a large volume of money parked in both short- and intermediate-term bond funds will transition to equity products based upon consecutive strong performance years and some concerns about the bond market and interest rates. We anticipate World Bond, Emerging Market Debt, and a number of other fixed income categories to be key contributors to industry sales.
Near-terms results support our view on new flows. When we look at weekly flows through 2/23/2011, net flows break down as follows:
- Equity – $31.3 billion
- Domestic - $19.1
- International Equity - $12.2B
- Fixed Income - $4.2 billion
- Taxable - $21.8 billion
- Municipal Bond – ($17.6B)
- Long-Term - $48.7 billion
If we were to annualize flows through 2/23/2011 it would lead to a net intake of $281 billion for 2011. We didn't anticipate domestic equity to get this strong, this quick; however, the overall transition from equity to fixed income is gaining momentum. Bond flows have been badly hurt by uncertainly in the muni market, but we are still seeing solid net sales to taxable bond funds.
We will continue to track and blog about industry net sales trends.
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FUSE Trend #5 - The next generations of pre-packaged solutions (models) at distributors will include greater choice and increased open architecture. Advancements in technology will move distributors closer to delivering truly customized solutions to their clients. Opportunities for third-party solution providers to distribute their products through more systems will emerge as open architecture is demanded by financial advisors.
Distributors are committed to a top-down approach to asset allocation and portfolio construction. However, they are being forced to provide multiple options because of:
- Resistance from financial advisors. Some financial advisors (many, actually) view portfolio construction and manager selection as a core part of what they do. Therefore, a distributor pushing limited solutions provider (primarily itself) would not suit many financial advisors;
- Liability. If a solution were to fundamentally fail or badly underperform, there is the potential for financial liability. Therefore, distributors will provide fully vetted third-party solutions to advisors, which will help ensure a consistent client experience, while also giving advisors multiple solution options to customize client models and portfolio construction;
- Finally, it is just good business. While many distributors believe they provide the best research and portfolio construction tools, they also acknowledge that there are a number of viable alternatives and that the industry is continually progressing toward more advanced solutions. Expanding the spectrum of choices to multiple, well-vetted options allows advisors to tailor solutions to the individual needs of their clients, while ensuring that distributors maintain a certain level of control over the quality of financial advice provided by their firms.
Overall, we firmly believe in the influence of the professional buyer. However, there will be modifications in how solutions are constructed and delivered to financial advisors and this will include quasi open architecture. This trend has already occurred on a number of levels – DC, variable annuities, advisory platforms, etc. – and it will proliferate in the solutions space as well.
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1) Planning for the Unexpected Is the Key to Financial Security in Retirement
MetLife | 2/16/2011
Because,,, The categorization of individuals into ten types, including Snoozers, Oversleepers, and Wood Knockers, along with personal stories, makes the study an interesting read. For retirement services providers, the study underscores the importance of client segmentation. Breaking down investors by individual values and preferences and providing solutions to meet their specific needs will enhance client experience and differentiate a firm from the competition.
2) Target-Date Fund Diversification Not Clear to Participants
Planadviser | 2/16/2011
Because… Knowing how investors use target date funds (TDF) in their portfolio could help TDF providers improve product design. TDFs are intended to be one-stop shop, but a large number of investors mix TDFs with other investments – with valid reasons. For one thing, the fear of handing over all retirement savings to one asset management firm may lead more plan sponsors and participants to consider multi-manager open-architecture platforms.
3) LPL Launches Fee-Based Variable Annuity Platform
On Wall Street | 2/17/2011
Because… Industry observers will follow the nation’s largest independent broker/dealer to see if its latest effort will bear fruit for the now publicly-held firm. Variable annuities are primarily a commission-based product. LPL will face headwinds in the marketplace, but the increased interest from fee-based advisors, discretionary management of VA assets, and the availability of VA products from some of the leading insurers may pave the way for success.
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1) IndexUniverse takes on Morningstar in ETF space race
Investment News | 2/7/2011
Because… The new rating system will present Morningstar a formidable challenge. Although Morningstar’s ranking system is more established and widely accepted, IndexUniverse’s approach, which focuses on some ETF attributes that Morningstar does not cover, will generate much attention. IndexUniverse’s insightful analysis of the marketplace and its expertise on index-based investments should benefit investors who look for another source of evaluating ETFs.
2) Schwab to make long-awaited move in 401(k) market with an all-indexed mutual fund and ETF strategy
RIABiz | 2/10/2011
Because… With fee disclosure requirements and plan participants’ demand for low-cost, passively managed investments, an index-oriented platform would potentially turn Schwab into a bigger player in the DC space. In particular, an all-ETF system that removes operational hurdles could encourage other ETF providers to break into the retirement market.
3) SEC said to ‘sweep' advisory firms for social-media info
Investment News | 2/14/2011
Because… An increasing number of firms have embraced social media as part of an integrated marketing strategy. Firms looking to grow their online presence need to have social media policies in place to avoid potential pitfalls. While social media tools help firms connect with investors and build brand equity, any breach of rules will tarnish the reputation and undermine investor trust.
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1) Janus to Unveil Protected Growth Fund
SEC Filings | 1/28/2011
Because… The capital protection provided by this new offering is unique. The fund may whet appetite of conservative investors looking for safety after being burnt by the market crisis. On the other hand, the fund has to allocate assets in a way to comply with the provisions of the Capital Protection Agreement and maintain the guarantee, which could limit its ability to capture gains in a rising market or trigger the guarantee prematurely that leads to early termination.
2) Retirement Assets Total $16.6 Trillion in Third Quarter
ICI | 1/31/2011
Because… The ICI overview of the retirement market is simply a must-read for all firms that target retirement channels. This new update shows that the U.S. retirement assets reached a new high, but still below the pre-crisis level of $17.9 trillion in 2007. Mutual funds remained the primary vehicle for DC and IRA assets, and target date fund assets hit record high of $306 billion despite all the controversies.
3) Fidelity Investments Takes Retirement Income Planning to a New Level on Behalf of Baby Boomers
Fidelity | 2/2/2011
Because… Fidelity’s initiatives are exemplary of what asset management firms can do to heighten public awareness of retirement income planning. Uncertainties of an individual’s life expectancy, future living and medical expenses, social security benefit, and inflation rates present great challenges for people to assess their retirement income needs, which has increased the demand for professional guidance and support.
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FUSE has moved its office space. Our new offices are located at:
200 Highland Avenue, Suite 402
Needham, MA 02494
Our new office phone numbers are:
- Neil Bathon -781-400-5345
- Mike Evans - 781-400-5538
- Sam Campbell - 781-400-5639
For more details around our move please click here
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Trend #4 - Distribution support will continue to evolve. We anticipate national account executives will increase their command of investment strategies and processes, so as to best position their organizations with distribution partners. In addition, firms will continue to dedicate incremental resources to their research support groups. Training and education of staff will be at the core of this trend.
We have observed this trend over the last several years and we believe it will gain greater traction in 2011, as a number of factors cause it to accelerate.
- Scalability of service effort. Asset managers will benefit from this service model because it is highly scalable. Utilizing a small group of research support/national accounts professionals to service both the business effort at distributors plus their due-diligence groups takes far fewer bodies than a grassroots wholesale effort.
- Significance of business. Gaining model placement can provide an asset manager with the opportunity to gather large volumes of business. A model allocation can result in asset gathering in the hundreds of millions of dollars, depending upon the size of the platform and the asset class.
- Top-down push from distributors. Advisors continue to feel pressure from home offices to utilize either the in-house asset allocation/portfolio construction tools or an approved third-party provider. This affords the distributor greater control over client assets and increases the consistency of the experience.
Most firms have embraced the research support service model. Organizations have dedicated expert support bodies to due-diligence groups at distributors and have created dedicated websites and materials. We believe firms that embrace this model will be the best partners to platforms. And, the best partners to distributors often get the best access to their systems.
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Please use the following phone numbers to contact us:
- Neil Bathon - 617-335-2283
- Mike Evans - 617-943-7135
- Sam Campbell - 617-256-7912
Our old numbers are out of service, so please use the above phone numbers to reach us.
Thank you.
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FUSE Trend #3: Alternative mutual funds will experience a bit of a setback as several manufacturers falter in 2011 due to a lack of experience that leads to a failure in strategy execution. The result will be heightened due diligence that differentiates those that have genuine expertise from those that have simply jumped on the sales bandwagon.
As investors continue to recover from the market’s dramatic decline in 2008, alternative strategies, particularly those that can produce more consistent returns regardless of the market, have experienced growing appeal. The result has been that some asset managers have undertaken product mandates that are outside the capabilities of their organizations in order to take advantage of a selling opportunity.
These strategies, which include market neutral, long-short, short-extension, and absolute return, give managers greater investment latitude by allowing them to use derivatives, employ leverage, or enter into short positions, all of which are relatively new tools to the historically long-only mutual fund industry. The disproportionate share of flows going to alternative-style mutual funds will continue to pique the interest of manufacturers. In 2010, alternative mutual funds captured $29 billion in flows and had a net sales-to-assets ratio of nearly 33%. In comparison the industry’s overall net sales-to-assets ratio for 2010 was 4%.
We anticipate demand to continue; it wouldn’t surprise us if alternative mutual funds doubled their assets over the next three years given current demand and sales trends. However, we believe the potential for setback is great as some new entrants manufacture products that fail to deliver on expectations.
As asset managers assess the alternative mutual fund space, they should ask themselves a few questions:
- Do we have experience managing the strategy or can we attain it, such as through a sub-advisory relationship?
- Does it fit with our brand (culture, identity, etc.)?
- Does it fit with our distribution effort?
- Can we train our sales force to sell it?
- Is there a reasonable chance we can be profitable in manufacturing this product?
Overall, we believe in the viability and growth prospects of alternative strategies within the mutual fund space. At the same time, we also believe there will be issues with some of the product manufacturing, which will likely lead to heightened scrutiny by research groups and platforms to ensure the soundness of the investment manager and its process. Those manufacturers that deliver will be rewarded. Those that do not will impact perceptions of the overall asset class, with the potential for residual negative influence across their entire product lineups.
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1) Pimco Takes Control of Fund Sales From Allianz After Assets Surge Sixfold
Bloomberg | 1/18/2011
Because… Industry observers will keep an eye on whether and when PIMCO’s move can cut costs for investors, as the firm claimed. Having its own distribution unit will better align sales goals with PIMCO’s corporate strategies. Being a reputable asset manager, PIMCO will have no problem attracting talented sales people. But if the market turns to favor equities, growing sales of fixed income products would be challenging.
2) VWO Becomes Biggest Emerging Markets ETF
IndexUniverse.com | 1/19/2011
Because… The outcome of the race between VWO and EEM had been predicted months ago. VWO’s winning indicates that for index-based ETFs, low cost, minimal tracking error, and portfolio diversification are vital. Funds with these attributes can take market share away from more established competitors over time as ETF investors have become more knowledgeable and discriminating.
3) A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers
ebri.org | 1/20/2011
Because… EBRI’s research results shed light on the impact of the financial crisis on Baby Boomers and Gen Xers and reveal the age and income groups that are at risk of insufficient retirement income. How to help these individuals save for retirement, invest in a rational and prudent way, and mitigate the longevity risk should become asset management firms’ top priority.
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FUSE Trends #2: The use of tactical asset allocation as a component of managing client portfolios will proliferate in 2011. As market and economic uncertainty continue to abound, investors are seeking increased flexibility to both mitigate risk and capitalize on opportunity. This trend was evident in 2010 by the growing popularity of tactically managed bond funds, which give portfolio managers the ability to move among fixed-income sectors, durations, credit qualities, and geographies, and is likely to carry over into equity portfolios in 2011.
We believe there are several reasons for the increased use of tactical asset allocation in portfolio design and construction both at distributors and asset managers:
- Risk management - During the most recent market decline, equity correlations converged toward one, leading many to believe that traditional, strategic asset allocation does not provide adequate diversification on the downside. Therefore, many advisors and research groups are employing tactical asset allocation strategies to better protect against downside risk.
- Search for alpha - As professional buyers research investment strategies, they are looking for a pattern of alpha. Paying for beta is no longer necessary; therefore investment management organizations are constructing products with broader parameters and less focus on style or market-cap in order to take advantage of market opportunities. This requires greater portfolio manager skill, and quickly distinguishes active managers who possess such skill from those that closely track their benchmarks.
- New asset allocation strategies - Distributors and advisors are employing more sophisticated asset allocation methods, with many turning to “go-anywhere” investment products, from multi-sector bond funds to absolute return portfolios. As a result, demand for these products is increasing and buying patterns differ from past trends of purely opportunistic sales efforts based upon hyper-competitive performance. Now it's more about process and consistency.
The current focus on tactical management presents a rare opportunity for active managers to showcase their value, but it is not without risk. We’ve all seen how missing the ten best trading days can result in very disappointing returns. Managers must know their spaces very well, while also keeping a pulse on the rapidly changing economic landscape, and they must clearly communicate their strategies to advisors.
At the end of the day, retail investors continue to lack confidence in the equity market, particularly the U.S. Large Cap space. In addition, many clients have lost confidence in their advisors. Employing tactical asset allocation strategies and speaking with clients about downside protection, is likely to lead to greater client security, which is the most important factor in maintaining client relationships.
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We recently released our ten trends for 2011. Over the next few weeks, we will be discussing those trends individually in the blog and adding a bit of color and additional commentary to each of the trends. The first trend is:
FUSE Trend #1: 2011 will be the year of benchmarking. Senior management has a newfound appreciation for refined management techniques, which include detailed measurement of productivity and efficiency of different functional areas like sales, marketing, and product management. This will lead to an increased demand for metrics to compare the productivity and efficiency of an individual organization with its peers.
Our reasoning for this trend goes far beyond our own research on the subject. We fundamentally believe that investment management firms need to increasingly integrate best practices to measure their organizations and refine/reorganize certain areas in order to improve their bottom lines. While investment managers continue to turn terrific profits compared to most industries (including their distribution partners), we believe the business is maturing and client demographics are likely to lead to slower growth rates.
In addition, for certain investment segments, net sales pale in comparison to historical numbers. For example, over the last ten years domestic equity products have captured $50 billion in aggregate net sales, or $5 billion per year net (ICI). And while we've gone through some tumultuous times, we need to come to the realization that for the most part the domestic equity sales game has been a takeaway business for a decade, with trillions of dollars moving among companies but de minimis new dollars.
So as an industry, we could bank on positive market conditions, but that isn’t sound business. Instead, we believe firms will be able to add substantially to their bottom lines by increasing the efficiency and improving the resource allocation of their organizations. And, a fundamental part of that is learning about what competitors are doing well and implementing those practices into your organization. Some questions include:
- Is sales optimally organized?
- Is our compensation structure appropriate to attract and motivate talent?
- Do we allocate sufficiently to training?
- Do we have the proper headcount?
- Are we segmenting our salesforce to capitalize on our most promising opportunities?
- Are we targeting the right channels for our product offerings?
- Do we have sufficient budgets for communications, value-add, technology, CRM?
- And on and on.
This leads to benchmarking.
Note: we will not be discussing the FUSE bonus trend or Super Bowl prediction as a part of this series (although we are still alive, go B's, C's, and Red Sox)
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1) ETF Securities Passes $3.5 Billion in US Assets Under Management
Business Wire | 1/7/2011
Because… The success ETF Securities and Global X have achieved indicates that new comers with a unique market positioning can take away market share from established players. Investors have been embracing commodity ETFs due to their fear for inflation, the current low interest rate, and the demand for alternative asset classes, but whether these niche ETF sponsors can keep the momentum down the road is worth watching.
2) Want Fund Managers on Your Side? Pick Those That Walk the Line
Morningstar | 1/10/2011
Because… Manager ownership could be the secret sauce for better fund performance. While Morningstar stressed that the correlation between the two “isn’t the same as causation”, we believe the alignment of interests, demonstration of commitment and confidence, and reflection of strong corporate culture should resonate well with many investors.
3) New Rydex Equal Weight ETF Begins Trading
Marketwire | 1/12/2011
Because… Rydex’s new addition has further established the firm as a leading provider of equal weight funds. Investors have taken notice of outperformance of equal weight ETFs and put a net $785 million into Rydex’s S&P 500 Equal Weight ETF (RSP) in December, making it the 12th best-selling fund among all long-term mutual funds and ETPs. RSP’s impressive sales helped Rydex become the industry’s third best-selling firm in the month.
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1) Callan Survey: Trends Swing Positive for Defined Contribution Plans
Callan | 1/4/2011
Because… Callan’s survey results identified trends (e.g. unbundling and focusing on fees) that should bode well for DCIO providers. To gain a competitive edge, asset management firms need to determine at the outset what market segments to target and develop an in-depth understanding of what these plans look for. Meanwhile, plan consultants and advisors can help DCIO managers build stronger relationships with plan sponsors.
2) The Incredible Shrinking Fee
The Wall Street Journal | 1/5/2011
Because… price cut has become one widely-used strategy to make a firm’s products more competitive. It can be effective for cost leaders that can realize the economies of scale. For services-oriented firms it is not the only way to entice investors. These firms differentiate themselves through value-added programs; however, they still need to align pricing with value delivery and investor expectation.
3) Active ETF Provider Grail Has Deal in the Works
ETF Trends | 1/6/2011
Because… The fate of Grail Advisors has been watched closely by industry observers. Despite being one of the most visible players in the active ETF space, Grail Advisors has had difficulties gathering assets. A liquidation of its entire lineup will further dampen investor interest in active ETFs. Hopefully, a firm with distribution prowess will be able to breathe new life into these young funds.
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1) Domestic ETF/ETP Assets Top $1 Trillion
On Wall Street | 12/20/2010
Because… The trillion dollar mark is a significant milestone for the burgeoning ETF industry. Although the industry is still facing many challenges, such as deeper penetration into 401(k) plans and the transparency issue for actively managed ETFs, the increased use of ETFs for portfolio construction and preference for ETFs by fee-based advisory programs will continue to bring ETF assets to new heights.
2) Investors return to hedge funds as $2 trillion mark approaches
Hedge Fund Review | 12/23/2010
Because… Investors’ return to hedge funds will not only be good news for hedge fund managers, but also benefit firms that perform hedge fund research and due diligence. The credit crisis has forced some hedge funds to close shops, while others are entering the industry to try their hands. Now more than ever, investors need assistance in sifting the good from the mediocre.
3) New Problems With 401(k) Target-Date Funds
Institutional Investors | 12/23/2010
Because… plan participants’ early withdrawals could make fund firms’ attempt to provide retirement income a futile effort. While target date fund providers have been pooling resources to refine their glide path design and blend in income components, investors’ illogical behaviors resulted from their lack of knowledge would prevent them from using appropriate investment options to combat longevity risk.
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A Period of Reassessment, Reevaluation, and Redefinition
As a part of our thought-leadership position, the senior team at FUSE Research Network LLC has identified some of the key themes from 2010.
For a link to the pdf click here
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1) iShares Announces Social Media Launch
iShares | 12/13/2010
Because… education is a key differentiator for ETF providers with index-based ETFs becoming increasingly commoditized. Despite a flourishing ETF market, investors’ knowledge is still woefully lacking. Recent surveys showed that both financial professionals and individual investors cited insufficient familiarity as the main reason for not embracing ETFs, so stepping up educational efforts would be an effective way for ETF providers to engage investors.
2) AXA Rosenberg faces a difficult road back
Pensions & Investments | 12/13/2010
Because… The drastic asset decline at AXA Rosenberg provided valuable lessons for asset management firms, especially those involved in the subadvisory business. Fund subadvisors need to be more forthcoming about portfolio management changes, whereas fund sponsors should closely monitor their subadvisors in order to protect themselves from brand erosion.
3) Investors Are Flocking to Emerging-Markets Bonds
Institutional Investors | 12/15/2010
Because…Investor demand is often a main driver of new product development. Emerging Market Bonds was one of the top-performers last year, but this asset class has its unique risk characteristics. Some industry professionals have warned it may be a bubble about to burst, so fund firms looking to launch such product need to explore the sustainability of its appeal and incorporate rigorous risk control measures into the investment process.
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1) Merrill Lynch Will Oust Low-Producing Vets, Sources Say
Financial Advisor |12/8/2010
Because… Implications of Merrill’s cost-cutting measure could be far-reaching although it is not the first firm to make such a move. To improve productivity, wirehouses would lure top producers with more attractive compensation packages. Independent and regional broker/dealers as well as RIA firms may benefit from the exodus of wirehouse advisors. These firms will spend more upgrading technology to better support the new recruits.
2) Gen Y to Great Recession: Message Received
TD Ameritrade | 12/8/2010
Because… Recent surveys on different generations’ financial behaviors and attitudes indicate that more financial services firms are considering the Gen Y a key target market. For these firms, a thorough understanding of this demographic group, its unique need for advice, and tactics that may resonate with these young investors should help formulate viable marketing and services strategies.
3) PIMCO'S Total Return fund bled $1.9 billion in November
Reuters | 12/10/2010
Because… The fact that the world’s largest mutual fund, an investors’ top bond pick in the past two years, was hit by sizable redemptions is noteworthy enough. The fund has raised far more assets this year than any other fund, but its outflows in the month may suggest that the bond market rally has largely run its course.
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1) US Labor Department proposes rule to enhance target date retirement fund disclosures
Press Release | 11/29/2010
Because… Better disclosure of target date funds is inevitable. Although plan sponsors are increasingly defaulting employees into target date funds, a clear understanding of these funds’ inner workings is still lacking. Merely improving transparency will not be enough. Effective education programs that help plan participants digest the detailed information and alert them to potential risks are more important.
2) SEC’s Asset Management Unit Priorities
MF Directors Forum | 11/29/2010
Because… Knowing the SEC’s focuses helps asset management firms set their priorities. With the SEC’s new Asset Management Unit closely monitoring the industry and more inclined to bring enforcement actions, firms will have to increase resources for compliance initiatives to keep informed about the latest regulations, stay compliant, and avoid noncompliance penalties and lawsuits.
3) The Role of IRAs in U.S. Households’ Saving for Retirement, 2010
ICI | 12/6/2010
Because… With more frequent job changes and the retirement of baby boomers, the IRA market is poised for faster growth, which presents significant opportunities for financial services firms. Value-added programs that provide guidance on regulations and investment strategies, deepened relationships with retirement plan advisors, tools that help investors assess retirement readiness, and a strong referral network of tax advisors and estate planners could all help firms capture IRA/rollover assets.
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1) Shedding Darkness On ETFs
The Wall Street Journal | 11/27/2010
Because… The problems with ETF prospectuses also exist in the mutual fund world. While the adoption of plain English summary prospectuses has enhanced readability of these legal documents, fund firms all too often use standard language that diminish their usefulness. Thinking from investors’ perspective and providing information most relevant to their decision-making process should be the first and foremost guideline.
2) Insider trading probe could rock mutual fund business
Investment News | 11/28/2010
Because… The wide-ranging insider trading probe has stirred mixed reactions from industry observers as to its impact on mutual fund flows. Firms that received requests for information from federal investigators may turn out to be innocent, but they will have to deal with the trust issue as, for many investors, the memory of the market timing scandal in 2003 is still lingering.
3) AllianceBernstein Launches Groundbreaking In-Plan Guaranteed Income Target-Date Solution
PR Newswire | 11/29/2010
Because… The financial crisis has accelerated demand for guaranteed income products. With a growing number of plan sponsors claiming to take a fresh look at retirement income offerings, firms are putting considerable resources into the product development effort. Ultimately, relatively simple design, lower costs, and lower risk exposure are among the elements that could win over plan sponsors.
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1) Oppenheimer eyes novel way of getting into actively managed ETF biz
Investment News | 11/15/2010
Because … Converting mutual funds into ETFs will remove one of the obstacles active ETFs currently face: the lack of track records. However, fund managers and existing shareholders may not favor the idea of disclosing holdings on a daily basis. Moreover, how regulators respond to fund firms’ requests would be unbeknownst to all.
2) Morgan Stanley Aims to Be Leader in Asset-Management by 2013
Bloomberg | 11/16/2010
Because… A number of aspiring firms are striving for a top spot in the industry. Ambition is necessary to take a firm to the next level, but fierce competition may make it an extremely difficult task. Top-performing products, integrated marketing strategies, an effective delivery system, a trusted brand, and high quality services are among the ingredients for success.
3) Franklin Templeton Enters Into Strategic Relationship With Pelagos Capital
MarketWatch | 11/17/2010
Because… We expect more traditional asset managers to seek such deals to shore up their alternative investment capabilities. An equity stake is a win-win for both parties, as firms can gain an easier access to alternative experts without too much initial capital investment, whereas small boutiques can leverage the larger firm’s distribution prowess without giving up too much control.
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1) 401(k) Asset Flows Swing over to Equities in October
Plansponsor | 11/8/2010
Because… The equity-oriented asset transfers within 401(k) plans are a positive sign, but the shift may not be sustainable, considering a plurality of investors are still reluctant to get back into the stock market. However, asset management firms should make an effort to get investors off the sidelines. Building their confidence in long-term equity investing and encouraging them to take advantage of dollar-cost-averaging could be a good starting point.
2) Legg Mason unveils 14 investment strategies to Asia
The Asset | 11/8/2010
Because… Many firms are looking to expand in Asia these days. Besides Legg Mason, Janus and Fidelity are reportedly eyeing Asia as well. Firms have to have a long-term vision if they want to build a strong presence in the region because Asian investors in general have a different mentality (e.g. preference for bank savings over investment products), so identifying feasible strategies that firms can use to capitalize on the opportunities would be a real challenge.
3) RIAs Acquiring More, But Not Just to Expand
Bank Investment Consultant | 11/10/2010
Because … Firms targeting the RIA channel need to ramp up their services as RIA M&A activity is setting a record pace. The demand from RIAs for helping them grow business through acquisitions or handle post-merger issues will increase. Asset managers should be prepared for working with client firms involved in M&As as their business model or organizational culture may change during the integration process.
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1) Some Funds May Lose Their Spot as MSSB Tidies Up Its Shelf Space
The Mutual Fund Wire | 11/2/2010
Because … With the plan to bring down the number of funds on its platform, MSSB is sending a clear message to asset managers that merely offering a wide array of investment choices will no longer work. Assisting advisors with portfolio construction, developing solution-oriented tools and educational resources, constantly communicating with advisors, and providing thought leadership are among the most effective ways to deepen relationships with distribution partners.
2) Low Yields Prompt Money Market Funds to Keep Waiving
The Bond Buyer | 11/2/2010
Because … Extremely low yields and substantial fee waivers have hurt asset managers’ ability to generate income from their money market fund offerings. It is time for asset managers to make a decision between forgoing the fee revenue indefinitely and exiting the money market fund business, as some firms have already done.
3) ICI Comment Letter on the SEC Proposal to Replace Rule 12b-1 with a New Distribution Framework
ICI | 11/5/2010
Because … Influential organizations, such as The SPARK Institute, Morningstar, and BlackRock, have questioned the SEC’s 12b-1 fee reform proposal. Their concerns about potential benefits to investors vs. unintended consequences may push the SEC to reconsider its 12b-2 rule. We think the final rule may diverge from what the SEC originally envisioned, but the regulator will surely restrict the use of 12b-1 fees.
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For the week ending October 27, 2010, long-term flows totaled $3.3 billion, which marked the 8th consecutive week of positive flows. The $3.3 billion net intake represented a $6.3B decline from the previous week and lagged the weekly average of 2010 by $2.4B.
Equity funds shifting from net inflows of $2.1 billion last week compared to net outflows of $2.3 billion this week accounted for the bulk of the week-over-week decline in net sales.
A closer look at the sales results shows an uptick in net redemptions from Domestic Equity products coupled with a decline in positive flows into Foreign Equity funds.
- Domestic Equity sustained $2.9 billion in net outflows up $2.7 billion from the previous week;
- Foreign Equity funds captured net inflows of $569 million, down from $1.7 billion the previous week.
This is the 8th consecutive week of positive flows into Foreign Equity funds. Domestic Equity funds, on the other hand, registered their 26th consecutive week of outflow. Perhaps investor anxiety related to the mid-term elections were a factor for equity fund flows this week.
Fixed Income funds recorded net flows of $5.3B for the current week, which was down $1.2B from the prior week. Flows into Taxable Bond funds were $4.8B for the current week, down $1.1B week over week. Muni Bond fund flows for the week were down just over $90M, to $545M.
Like every other category, Hybrid fund flows for the week were down from the prior week, but flows were positive for the 8th consecutive week. Net sales into Hybrid funds totaled $356M for the current week, a decline of $650M from the prior week.
Source: Investment Company Institute
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1) A Third of Active Managers Are in the Indexing Closet
The Mutual Fund Wire | 10/11/2010
Because… Research like this will steer more investors to passively managed mutual funds and ETFs. Closet indexers will eventually succumb to the competition as it is hard to justify the fees they charge. Only active managers with a unique value proposition or a proven track record can gain more market share in the long run.
2) SEC Proposes New Definition of 'Family Office'
Financial Planning | 10/13/2010
Because… The proposed SEC rule will set new standards for 2,500 to 3,000 single family offices managing more than $1.2 trillion in assets. A number of them that will not qualify for the regulatory exemption will likely turn to RIAs for investment advisory services if they are not intended to register themselves as an RIA.
3) US Labor Department issues final rule to improve transparency of fees and expenses to workers with 401(k)–type retirement plans
Press Release | 10/14/2010
Because… The enhanced transparency will increase accountability and competition among service providers, which could potentially result in lowered fees. Service providers will also have to ponder how to provide timely and adequate information so that plan participants do not feel overwhelmed.
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Long-term net sales totaled $4.2B for the week ended October 6, which represented an improvement over the prior week by $1.3B but lagged the average weekly net flow of $5.6B. This is the fifth consecutive week of positive flows.
As has been the case since January of 2009, weekly net flows into Fixed Income funds dominated all other broad asset classes. For the week, net flows into Fixed Income funds totaled $7.8B and exceeded the year-to-date weekly average, which currently sits at $6.5B. Taxable Bond net flows for the week were slightly above average at $7.2B and Muni Bond net flows were slightly below average for the year at $600M.
Hybrid funds also experienced their 5th consecutive week of positive net flows with $747M coming in. YTD, weekly net flows into Hybrid funds have averaged about $400M. Since the string of positive weekly net flows began 5 weeks ago, each week has been well above this average. Could it be that investors are starting to dip their toes into the domestic equity markets via Hybrid offerings?
It continues to be two very different tales among Equity funds. In the aggregate, weekly net flows for Equity funds were negative $4.3B – about $1.2B worse than last week. However, we once again arrived at this result via very heavy net negative flows among Domestic Equity funds.
Domestic Equity funds net flows were negative $5.6B. This is well above the weekly average outflow year-to-date of just over $2B/week and about $1.4B worse than last week’s result. Strong returns in the domestic equity markets are having no effect on the steady flow of assets from funds investing domestically.
While Domestic Equity funds continue to hemorrhage, Foreign Equity funds continue to record strong net flows ending the week with positive net flows of $1.3B. This is also the 5th consecutive week of positive flows for Foreign Equity funds and this week’s net flows are the highest weekly total in over 5 months.
Source: Investment Company Institute
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1) Vanguard Reduces the Cost of Investing by Broadening Availability of Admiral Shares
Business Wire | 10/6/2010
Because … The move to lower the eligibility threshold will shift an estimated $90 billion from Investor shares to Admiral shares. With some of Admiral shares’ expense ratios comparable with those of Vanguard’s ETFs, Vanguard is delivering cost savings to investors with smaller accounts. The reduced minimums would also attract new investors looking to roll over retirement assets.
2) TD Ameritrade Waives Trading Fees on 101 ETFs
The New York Times | 10/8/2010
Because…The independence of TD Ameritrade, the wide selection of commission-free ETFs, and the seal of approval from Morningstar would help retain retail investors and advisors without giving them an excuse to switch to Fidelity, Vanguard, or Schwab. We can only imagine no-transaction-fee (NTF) ETFs will be as prevalent as NTF mutual funds in the not-too-distant future.
3) Invesco PowerShares Announces Changes to ETF Family
Marketwire | 10/8/2010
Because… A string of recent fund closures demonstrates the intense competition in the ETF space. Despite the rapid growth of the ETF industry, some funds are either too narrowly focused or consistently have low trading volume. Potential ETF contenders need to glean some lessons from failed funds and choose product strategies that can truly fit market needs.
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For the week ending September 29th, 2010, aggregate net fund flows totaled $3.3B, which represented only 58% of the weekly average of 2010 ($5.7B). For the month of September, aggregate flows totaled $19.4B, a far cry from September of 2009 when aggregate flows for the month were $34.7B.
Among the broad asset classes, Foreign Equity and Hybrid had the strongest relative flows for the week. Foreign Equity funds brought in $1.1B, which was 57% higher than the weekly average for the category in 2010. As advisors continue to reevaluate asset allocation decisions, there is little doubt that Foreign Equity funds are benefiting. Estimated net flows into Hybrid funds also had a relatively strong week, recording $858M of flows which more than doubled the weekly average of 2010.
Fixed Income funds produced the strongest net sales on an absolute basis with $5.4B of net inflows; however, net sales were more than $1B or 17% below the weekly average of 2010. Taxable Bond funds took in $4.8B for the week, while Muni Bond funds garnered just over $600M, both below the averages for the year. There is no doubt that the less than stellar performance of the bond market of late is taking a toll on Fixed Income flows.
Domestic Equity funds ended the month with another tough week - estimated net outflows of $4.2B. This weekly net outflow was more than double the average ($1.9B) for 2010. As noted last week, investors are still very weary of the domestic equity markets; and this is despite the fact that September of 2010 was the strongest in terms of market performance since 1937.
Source: Investment Company Institute
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1) Vanguard to Simplify Funds, Increase International Exposure
On Wall Street | 9/27/2010
Because…Quite a few firms have revamped their target date funds, mainly to provide more downside protection. While it is early to tell whether all the adjustments will work wonders when the market tumbles again, it is important for fund providers to ensure plan sponsors and participants understand the rationale behind the changes as well as embedded risks associated with new methodologies.
2) Mutual Fund Shareholders’ Risk Tolerance Has Not Rebounded Since the Financial Crisis
ICI | 9/28/2010
Because… Asset management firms should realize that investors’ risk tolerance will stay low in the near future until the equity market recovers with a sustainable rally. Firms need to align their marketing focus around products that take a defensive approach and incorporate investors’ risk aversion into new product development.
3) CFTC and SEC Will Blame Unnamed Waddell for Flash Crash
MFWire | 10/01/2010
Because…Many argue W&R is not a culprit. Whom to blame is a thing of the past. More emphasis should be put on how to strengthen risk management and control tail risk going forward. The SEC may impose new trading regulations to ward off another flash crash, but market disruptions may not be completely avoided after all.
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According to fund flow data from ICI for the week ending September 22, 2010 estimated flows were $5.75B. In the aggregate, this total is just a hair higher than the average weekly flow so far in 2010 of $5.72B. However, the components of the aggregate were not quite so average for the week.
Fixed Income funds continue to dominate flows, as they have for the better part of 2 years. In fact, the last time equity flows (domestic and foreign) exceeded fixed income flows (taxable and muni) was the 3rd week of January 2009, a stretch of 21 months. For this most recent week, fixed income flows of $6.9B exceeded their year-to-date weekly average of $6.5B, but were down almost $1B from the previous week. Estimated fixed income flows for the year are $246.5B compared to $257.1B for the same period last year.
Flows into hybrid funds for the week were strong at $740M, almost double their year-to-date weekly average of $380M and the 3rd consecutive week where flows were positive. Weekly flows into hybrid funds have been positive 30 out of 38 weeks so far in 2010 and total $14.4B for the year. Through the same period last year, hybrid flows were only $13.4B. It will be interesting to see if this moderate improvement in hybrid flows is a precursor of things to come for equity flows.
In the aggregate, equity flows for the week continued to suffer with a estimated net outflow of $1.9B. On average this year, aggregate equity outflows on a weekly basis have been about $1.1B, so this past week was noticeably worse. A result that seems to clearly indicate investors are still weary of equities despite the strong market returns posted for most of September. This is the 21st consecutive week of outflows for equity funds.
As has been well documented, foreign equity funds have produced solid flows in 2010, which makes the flow situation for domestic equity funds that much more anemic. Flows out of domestic equity funds for the week were $2.5B compared to a weekly average of $1.9B for the year. So far this year, domestic equity funds have experienced net outflows of $70.5B compared to just $14.8B of outflows for the same period last year. Foreign equity funds by comparison have experienced strong flows. For the most recent week foreign equity flows totaled $616M compared to a weekly average of $706M for the year. Total flows into foreign equity funds this year stand at $26.8B compared to inflows of $3.3B for the same period last year.
Finally, the consistent flow of money out of retail money market funds continued this past week, however, at a heavier pace than average. For the most recent week investors pulled $6.4B out of their money funds. This is more than twice the average weekly rate for the year of $3.1B. As of last week, retail money fund assets stood at $958.2B, down from the $1,076B where they started 2010.
Source: Investment Company Institute
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1) iShares launches swap-based ETF platform
Hedge Fund Review | 9/20/2010
Because… Swap-based ETFs, while common in Europe, have not made an appearance in the U.S. Combining synthetic replication with multiple counterparties and full transparency of a physical-based approach, these new iShares funds may represent the design of next-generation ETFs. But the structural complexity could limit the use of funds to sophisticated institutional investors only.
2) IRA Balances and Contributions: An Overview of the EBRI IRA Database
Press Release | 9/21/2010
Because… Products sold through IRA platforms could generate higher margins, along with the fact that most DC plan participants roll over their assets to IRA accounts, making the IRA market very attractive. A detailed analysis of IRA types and investor segments helps fund firms reevaluate their distribution priorities and product positioning.
3) Claymore takes its parent’s name
Press Release | 9/27/2010
Because… brand management has become an integral part of an overall M&A strategy. A carefully-chosen post-merger brand can increase employee and client loyalty, and enhance the perceived value of the brand in the marketplace. With more firms on the M&A hunt, they need to ensure their brand’s long-term viability is not put in jeopardy.
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1) Rydex Files For 19 Equity ETFs
SEC Filings | 9/13/2010
Because… Rydex is drawing investor attention to advantages of equity-weighted indexes, which offer greater exposure to smaller stocks. With the filing for 19 new ETFs, Rydex expects to capitalize on the success of its S&P Equal Weight ETF (RSP) and become the most recognizable player in this space.
2) Man Group Adds to North America Sales & Marketing
Financial Planning | 9/14/2010
Because…Just as U.S. firms are expanding overseas, foreign companies, such as Man Group and Barclays, are rushing to tread on U.S. turf. Although these firms are unlikely to pose an immediate challenge, U.S. firms have to develop strategies to defend their turf; otherwise, they will gradually lose market shares to their foreign rivals.
3) Insurers Press U.S. To Let Employers Offer Retirement Annuities
Financial Advisor | 9/15/2010
Because… The government focus on in-plan lifetime income options has created a lot of buzz in the past week, but plan participants’ reluctance to put savings into annuities and plan sponsors’ concerns about costs and fiduciary duties suggest that the demand could remain low in the near future.
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1) PIMCO Plans Up to Five More Equities Strategies
Reuters | 9/2/2010
Because…The successful launch of the firm’s first equity fund and the strong investor interest in the PIMCO brand will likely turn the bond fund powerhouse into an equally formidable competitor in the equity fund space.
2) Janus Jumps on the ETF Bandwagon
SEC Filings | 9/3/2010
Because… a firm that used to be concerned about daily disclosure and fiduciary duty finally came to terms with ETFs. It would be interesting to see what investment strategy Janus will be using to deal with the portfolio transparency issue and if the firm will be hiring external subadvisors.
3) Vanguard Introduces Series of Low-Cost Index Funds and ETFs Based on S&P Benchmarks
MarketWatch | 9/9/2010
Because… Vanguard’s new funds will target existing S&P ETFs and intensify price competition among broad-based ETFs. And the launch of equity funds at a time investors are pouring money into fixed income funds suggests that the firm will be ready when the pendulum swings back to equities.
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Deciding which products to include in a focused marketing campaign can be challenging in a volatile market where confident market predictions are the exception. Below we list a few fund marketing “strategies” we have observed over the years and some essential ingredients to an effective campaign.
- Momentum – Marketing the hot dot can be quite effective - after all you are selling funds advisors and clients generally want or think they want. However, marketers employing this strategy must choose their entry points carefully to catch the impending wave of net flows chasing performance. Of course this strategy carries a lot of risk and has burned many a marketer.
- Contrarian — An advanced marketing strategy for experienced marketers that want to differentiate their story from 700+ other fund companies competing for advisor assets. Of course, incorrect product/market calls can be disastrous so it is best pursued as a part of the “Hedged” strategy described below.
- Deep Value — Sometimes it doesn’t matter what the market is doing or will do because a marketer’s product line is dismal. In this case, marketers can subtly play the “reversion to the mean” card and imply that the situation can only get better.
- Replication – This strategy revolves around mimicking the market calls of the home office at each major distributor a firm works with. For example, if LPL’s strategist is calling for growth to outperform value, start beating the drum for your Captial Appreciation fund among the firm’s reps.
- Hedged — Though marketers risk watering down their campaigns, pushing top-performing funds alongside out-of favor products can help lower both sales and employment risk.
Whatever strategy or combination of strategies firms choose to employ, FUSE recommends that the following attributes be consistently applied:
- Always market funds against the backdrop of effective investment process and people messaging. While highlighting Morningstar ratings, always emphasize the process which led to those ratings.
- Segment your existing client base to tailor the campaign towards statically likely buyers
- Always give precedent to strategies with multiple wrappers (Fund, SMA, etc) or those prevalent in models programs
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Here is a quick take on the proposed changes to 12b-1 fees by consitituency:
- Fund Companies – Fund share class types span the alphabet to cater to investor and distribution channel preferences. Should the proposed ruling take effect in its current form, the fate of a handful of share classes which cater to the retirement channel will be put in question. These costs won’t disappear but will instead be re-routed and re-labeled in an attempt to transform embedded costs to explicit ones. Charging for services at the client/plan sponsor level will require new plumbing but will introduce even more pricing variability and free asset managers from the share-class pricing burden that impairs competition and the “free movement” of prices. However, it remains to be seen whether distributors will take on the responsibility of charging the client or simply demand the same level of support from asset managers without taking on pricing responsibilities.
- Advisors – A small segment of the advisor population does a majority of its business in C-shares. Some advisors use C-shares to transition their book of business to a fee-based model, others use C-shares to “hide” the costs of their services on monthly client statements. The rule will help alleviate the latter use of C-shares and will drive this business towards advisory platforms which often use load-waived shares and clearly disclose the cost of advice.
- Broker-Dealers - As assets migrate from C-shares to converted A-shares or advisory platforms, we should expect more price competition at the broker-dealer level. Competition will increase as BDs market competitive commission rates and advisory pricing schedules. However, clients will be hard pressed to compare and contrast pricing options as the data will be largely unavailable or difficult to obtain.
- Operational Concerns – We assume that if other individual investor data such as redemption activity and Patriot Act related data can be tracked, than 12b-1 fees can also be accounted for at the shareholder level. That said, we expect the majority of the burden and accompanying costs of tracking this data will likely be subsidized by asset managers.
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The unprecedented asset shift to fixed-income is potentially at risk given the odds of interest rate and inflation increases. This fact will challenge fund companies to proactively arm their distribution teams with the right messaging and advice to their advisor constituents. We believe the following broad themes would be beneficial to most fixed-income marketing campaigns going forward:
- Inflation risks aren’t geography neutral – Emphasize global and international fixed-income strategies that monitor inflation trends globally. The evaluation of country-specific credit and fiscal risks on a global basis will help investors avoid emerging pockets of inflation and take advantage of the low correlation of bond performance that can occur across countries. That said, expectations of inflation continue to be pushed out into the future.
- Multi-strategy, dynamic approach – If everyone knew the answer to fighting inflation, it would no longer be the question. Taking a multi-asset class/strategy approach (high yield, convertibles, securitized, commodities, FX, global TIPS) to inflation fighting makes the most sense for fund companies playing the percentages. A strategy of this type will naturally limit the number of fund companies that can credibly offer such an approach to those larger in scale and those tapping sub-advisors or affiliates.
- Emphasis on credit-specific research – All the macro talk can prompt advisors to forget the importance of security selection and that certain credits will outperform others regardless of the interest rate or inflation scenario (i.e. specific risk). Of course, demonstrating actual evidence of alpha-producing credit research would be helpful.
- Yield is on your side – Relative to treasuries, higher yielding corporate credits can better offset interest rate increases as the greater yield compensates for capital losses resulting from interest rate increases. The emphasis here is on total return and highly dependent on our third bullet point.
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ETF sector assets have grown on a compounded basis at 37% over the past five years while mutual fund sector assets have posted negative growth of 4% over the same time period. Over time ETF sector fund launches have been negatively correlated with fund sector launches due to a number of reasons including:
- Fee sensitivity among all classes of fund buyers has increased
- The presence of institutional and hedge fund buyers that were not traditionally mutual fund buyers has brought a new source of assets and demands for more specialized/niche ETF offerings
- Growth of ETF managed account programs that rely on sector ETFs as building blocks
- Troubles in the closed-end market (ARPs, persistent discounts) has caused product manufacturers to reroute new strategies into the ETF chassis.
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Net sales totaled a modest $3.1 billion for the week ended June 16, as Fixed Income inflows were offset by net redemptions from Equity products. Taxable Bond continues to dominate the net flow charts, as the category produced $4.2 billion for the week. The other fixed income broad category, Municipal Bond funds, were largely flat for the week ($242M in). Conversely, Domestic Equity funds sustained net redemptions of $1.8 billion, while Foreign Equity were flat and Hybrid funds produced modest inflows.
Overall, economic uncertainty continues to impact the equity markets and mutual fund investors are looking for safety.
Source: Investment Company Institute
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Long-term mutual funds captured net inflows of $2.1 billion for the week ended June 9, as $4.3 billion in net inflows into Taxable Bond funds were largely offset by net outflows of $3.7 billion from Domestic Equity products. The three remaining broad categories were largely flat, as Foreign Equity, Hybrid, and Municipal Bond funds captured net inflows of $1.4 billion. Market uncertainly continues to drive dollars away from Domestic Equity, while the tiny yield of cash products has shifted money into short- and intermediate-term fixed income products.
Source: Investment Company Institute
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In general, quant funds are poorly understood among many retail buyers. The fact that some well known quant shops have experienced recent bouts of underperformance has not helped the industry to frame positive conversations around quantitative investment processes. That said, we believe managers should be proactively clearing common misconceptions and biases which exist in certain segments of the retail market:
- Misconception #1 - Quant funds underperform fundamental strategies
- Quantitative and fundamental strategies have tended to produce alpha in cyclical patterns and one could make an effective case for blending the two for added diversification purposes.
- Many quant models are based on fundamental factors, which are based on rational economic theory. A simplistic example based on mean reversion theory - low p/e stocks tend to outperform high p/e stocks over time.
- Misconception #2 - Quantitative funds invest via a “set and forget it” black box engine
- Quantitative models are not static – quantitative researchers are constantly adding and deleting factors in an ever evolving process. Often times, quants are refining their models based on the latest in investment theory and academic research.
- Managers should emphasize the discipline inherent in quant models. For example, consider a fundamental and a quant strategy that underperform over a quarter. The quant manager can point to specific factors that either contributed or detracted from performance while the fundamental managers must rely on “softer” reasons for underperformance that is often linked to stock-specific events.
- Misconception #3- Quant funds are all the same
- Quant funds come in all shapes and sizes. While some funds may exhibit some commonality of factors, the weightings of factors within models can vary dramatically.
- Increasingly, more firms are combining quantitative and fundamental processes. Today, T.Rowe, MFS, INVESCO, Vangaurd, and Goldman all offer some variant of a “quantemental” strategy.
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Net sales turned positive during the week ended June 2 with net inflows of $3.8 billion, which is a reversal from the previous week when net outflows totaled $16.6 billion. Domestic Equity products were negative for the fifth consecutive week, while the remaining four broad categories produced net inflows.
YTD net sales results are solid. In total, long-term funds have captured $159 billion YTD. Fixed Income products accounted for 90.6% of long-term net flows ($144B), Foreign Equity ($25B) and Hybrid ($13B) were also positive contributors to industry flows. Only Domestic Equity funds have sustained net outflows in 2010, as YTD net outflows total $23.1 billion.
Source: Investment Company Institute
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The drive to launch alternative funds in the ’40 Act structure is completely rational. On the demand side, investors and advisors are seeking new strategies in response to once in a lifetime market events and in preparation for longer retirements. From a supply perspective, fund companies are feeling margin pressure, as ETFs take share from core products and asset gathering in general has becomes more difficult. That said, FUSE believes that many fund companies are faced with a few structural challenges that may be too difficult to overcome.
- Fees and culture – The hedge fund industry isn’t dead and neither is the lucrative 2 and 20 fee structure that many funds charge their HNW and institutional clients. Additionally, many portfolio managers worth their salt still prefer the owner operator model to the life of an employee at a compliance/beaurocracy heavy mutual fund shop.
- Brand – If you build it will the assets come? It’s hard to say. Most fund companies with a vanilla long-only fund brand will be hard pressed to credibly present their alternatives prowess in a market that is increasingly being populated by “real” alternative managers that have proven their worth in the private fund market. The multi-boutique shops with alternative focused affiliates will have the competitive edge over traditional players.
- Justifying Fees – When you launch a fancy new fund with a TER that may be a multiple of existing long-only strategies, expectations among fund buyers will be set accordingly. After reviewing a few fund company lineups and comparing their alternative funds to their balanced funds, we suspect some creative justifications for fee charges may be in order.
While unaffiliated sub-advisory relationships can fill the alternatives gap for some, we believe that the majority of fund companies would be better served focusing their resources (monetary and human) towards investing in existing strategies and re-engineering out-dated distribution infrastructures.
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The week of May 26 marked the largest period of net outflows in 62 week. Net redemptions totaled $16.6 billion, as equity (both foreign and domestice) and hybrid products sustained net outflows of nearly $20 billion. Taxable Bond funds were once again positive at $2.4 billion, while municipal bond funds netted $459 million in inflows.
Over the past three weeks equity and hybrid products have lost nearly $31 billion. The breakdown was:
- Domestic Equity - ($21B)
- Foreign Equity - ($7.3B)
- Hybrid - ($2.1B)
Source: Investment Company Institute
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After a 60 week run of positive flows, net sales turned negative for the week ended May 12. Net redemptions totaled $14 billion during the week, as four of the five broad objectives sustained net outflows.
- Domestic Equity funds were the biggest redeemers with net outflows of $8.6 billion. It marked the 2nd consecutive week of net outflows, and during the two weeks ended May 12, net redemptions totaled $10.9 billion.
- International Equity were in the red for $3.7 billion. It marked only the 2nd time in 2010 that International Equity products sustained net redemptions for a weekly period.
- Taxable Fixed Income were shockingly in the red for the week. Net redemptions totaled $1.5 billion from the category. During the previous 52 weeks, net flows averaged $6.9 billion with zero weeks of net outflows.
- Both Hybrid and Municipal Bond funds were largely flows with net outflows of $700 million from Hybrid products and net inflows of $550 million into Muni funds.
- Retail money market funds picked up nearly $16 billion during the week, as retail investors moved a significant chunk of money from long-term funds to pure safety.
Source: Investment Company Institute
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After applying a commonly used industry concentration ratio to several segments of the retail investment industry, a couple of broad realities surfaced:
- Passive ETF assets are very concentrated. While some firms may see an opportunity to steal market share others won’t waste their time competing against firms in an oligopoly that protects market share through price and product development efficiencies.
- After considering the exchange-traded marketplace, the opportunity set appears refreshingly broader in the traditional fund and sub-advisory spaces.
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After a resoundingly successful initial public offering in March, Financial Engines recently filed its first 10-Q in which the firm reported a revenue increase of 40% to $24.3 million for the first quarter 2010 compared to $17.4 million for the first quarter of 2009. Beyond the numbers, we pulled a few interesting points from this quarter’s filing (quotes in italics).
Concentration of revenue…
For the three months ended March 31, 2010, 19%, 7% and 7% of our total revenue was attributable to JP Morgan, ING and Vanguard, respectively, the three retirement plan providers with whom we have subadvisory relationships. Revenue attributable to these three plan providers includes subadvisory fees they pay to us directly, as well as revenue from certain plan sponsors that work with these plan providers but pay us directly. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 7% and 7%, respectively, of our total revenue for the first quarter of 2010.
Penetration within client base…
**We measure enrollment in our Professional Management service by members as a percentage of plan participants, and by AUM as a percentage of Assets Under Contract (“AUC”), in each case across all plans where the Professional Management program is available for enrollment, including plans where enrollment campaigns are not yet concluded or have not been commenced. In addition to measuring enrollment in all plans where the Professional Management program is available, we measure enrollment in plans where the Professional Management program has been available for at least 14 months and in plans where it has been available for at least 26 months.
Thoughts on the competition…
We operate in a highly competitive industry, with many investment advice providers competing for business from individual investors, financial advisors and institutional customers. Direct competitors that offer independent portfolio management and investment advisory services to plan participants in the workplace include Morningstar, Inc., GuidedChoice and ProManage LLC. Plan providers that offer directly competing portfolio management and investment advisory services to investors in the workplace include Fidelity and Merrill Lynch. We currently have a relationship with Fidelity that allows us to provide our services to plan sponsors that elect to hire us, for which Fidelity is the plan provider. We also face indirect competition from products that could potentially substitute for our portfolio management services, investment advice and retirement help, most notably target-date retirement funds. Target-date funds are offered by multiple financial institutions, including BlackRock (formerly Barclays Global Investors), T. Rowe Price, Fidelity and Vanguard.
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The Barclays CTA index posted a 14.09% gain in 2008, while the Standard & Poor's 500 index dropped 37% and the MSCI World index suffered a 42% loss. Since then, interest in the asset class and assets have grown in both institutional and retail channels. A few thoughts on growth of this emerging retail product:
- Not for everyone - Rydex|SGI and AQR have already proven the retail viability of managed futures strategies; however, the universe of mutual fund managers that can credibly mange the product is limited to those that possess hedge fund roots or those farming management out to sub-advisors.
- Sub-advisory - Investment manager outsourcers will increasingly get in the game. CTA firms often come and go however fund complexes can add significant value by sourcing quality managers.
- Multi-manager - CTA styles are as varied as the asset classes they trade in. While some CTAs trade purely in commodities or agriculture others ply their trade in interest rates. Packaging specialist together into a best-of-breed ‘40 Act fund structure would be compelling. Equinox Fund Management recently launched an innovative product whereby the fund invests in underlying CTA hedge funds via total return swaps. The novel structure seeks to bring together non-correlated alpha producing managers at the expense of added counterparty risk via the swaps agreements. (For the SEC Filing click here)
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MFS and John Hancock have recently talked publicly about diversifying fund sales via compensation changes which incentivize wholesalers to vary their sales efforts. To add to a recent FUSE blog on the subject, we decided to take a snap shot of 1Q10 net sales to determine which fund companies are driving sales across their lineup. The first quarter of 2010 was a good environment for “diverse” net sales as bond flow momentum remained strong and investors built up their appetite for equities.
While not flawless, we settled on the following filters to pare down the universe of large asset managers:
- Mutual fund managers only (606 firms)
- Managers with fund offerings in at least 4 of the 7 broad Morningstar Categories (150 firms)
- Managers with positive aggregate long-term net flows of at least $500 million (38 firms)
- Manager’s with net sales in at least three broad categories of at least 20% of the aggregate firm net flow(6 firms)
The winners:
Source: FUSE, Morningstar
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Long-term mutual funds produced solid sales numbers once again, as net inflows totaled $9 billion ofr the week ended April 14. Taxable Bond ($6.1B), Foreign Equity ($1.7B), and Hybrid ($1.1B) were the top three selling categories, while Domestic Equity ($461M) and Municipal Bond (-$251M) funds were mostly flat.
YTD numbers are solid as well. The breakdown by broad category is below:
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YTD Flows
$B
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| Taxable Bond |
$94.8
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| Foreign Equity |
$27.4
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| Municipal Bond |
$14.5
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| Hybrid |
$12.2
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| Domestic Equity |
($1.3)
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| Total |
$147.5
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Source: Investment Company Institute
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Net flows were appreciably higher for the week ended April 7. Long-term funds captured net sales of $12.6 billion, which more than doubled the previous week. All five broad categories were positive, led by net inflows of $6.1 billion into Taxable Fixed Income funds. Foreign and Domestic Equity funds ranked #1 and #2 with a net intake of $2.9 and $1.9 billion, respectively. Hybrid funds also topped the $1 billion mark for the week, while Municipal Bond funds netted $351 million.
Source: Investment Company Institute
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Diversifying mutual sales is a good objective — the risks of underperformance and severe market rotations are just too great to bet the farm on the revenue stream on one or two “it” funds. Expanding the number and type of advisors that wholesalers regularly service is essential to driving new business into “forgotten” funds. However many veteran wholesalers generally have an established base of roughly 100 - 125 advisors that consistently generate flow within their territories. Breaking this cycle of reliance and loyalty is a difficult task for many funds groups that want to avoid the hazards of asset concentration. To aid the transition, FUSE encourages fund groups to consider the following when implementing structural compensation shifts:
Ease the transition - Implement major compensation changes alongside positive developments such as a new broker-dealer partners, product launches, or platform/research wins.
Arm your sales force – Diversifying sales isn’t a single front war fought by the wholesaler and his/her internal. Support in the form of advertising, public relations, and value added materials must be coordinated to broaden the appeal of a firm’s forgotten funds.
Be Consistent – Hold non-field personnel such as national sales managers, relationship managers, and key accounts personnel to the same objectives as field wholesalers. Firm wide financial incentives unify the cause and bolster management’s credibility.
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Fifty five consecutive weeks and counting for positive net flows into long-term funds. Net inflows totaled a modest $5.8 billion, which is the 2nd lowest weekly result in 2010 and a 39% drop from the previous week.
Taxable Bond funds captured net inflows of $4.5 billion, while Hybrid ($861M) and Foreign Equity ($472M) ranked #2 and #3 among the broad categories. Domestic Equity and Muni Bond were flat for the week.
Net flows in 2010 totaled $127 billion YTD through March 31. Taxable Bond funds continue to dominate flows with YTD sales of $83 billion. Foreign Equity ($23B) and Municipal Bond ($14B) trailed Taxable Bond funds YTD.
Source: Investment Company Institute
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A recent report from Berkshire Capital Securities provided some statistics on the volume and the magnitude of investment manager transactions in 2009. The total number of transactions was 135, which was in line with 2005 but well below the volume of deals consumated over the last three years. Despite the relatively small volume of deals, both the value ($31.7B) and AUM changing hands ($3.3T), represented the highest annual period covered in the report (2005-2009).
Of the $31.7 billion in deal value, nearly 43% was derived from the iShares/BlackRock transaction. A link to the entire report can be found here
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1) John Hancock and MFS change pay programs for wholesalers
Investment News | 3/23/2010
Because … Wholesaler compensation models and trends are always a hot topic, and staying on top of efforts such as these are important to staying abreast of the industry’s competitive dynamics.
2) Putnam to Cut Sales Charges on Three of its Funds
SEC Filings | 3/23/2010
Because … The recent dominance of fixed income funds, and the expectation of continued and sustained interest, have made many firms revise the pricing elements of their bond funds. Change may not be necessary, but a reassessment exercise is absolutely needed.
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Launching fixed-income products has been the obvious play for asset managers seeking to capitalize on unprecedented net flows into the category. Lately, the ETF industry has focused on new product development and seized the “innovative” label while the fund industry is seemingly mired in a quagmire of rationalizing and liquidating a bloated inventory of over 7500 funds. In stark contrast to the historical record, advisors and investors are increasing looking to the ETF industry first for new innovations and solutions. Products among the new breed of fixed-income ETF solutions:
- Target Maturity Bond Portfolios – These funds are solution oriented. Barclays, Claymore, SSgA have or are about to launch these innovate products which will help bring laddering downstream while adding a layer of diversification to the typical ladder.
- Sector Specific Fixed-Income – ETFs have made significant inroads within the equity sector categories, it seems only natural for them to create and dominate this burgeoning category. SSgA has filed to launch several industry specific bond ETFs including Financials, Utilities, and Industrials.
- Money Market Alternatives - While money market funds waive their fees to maintain the buck, ETF providers are marketing higher-yielding alternatives. While these ETFs might just be packaging and marketing, if they look and sound good, assets will likely follow.
- Inverse Returns - While potential provider list for this type of product is naturally short, the popularity of these ETFs has demonstrated how product innovation can drive serious asset gather opportunities.
While the track-records are limited on these products, the potential is clear and product development executives at fund companies should take note.
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1) Dodd Bill Requires Year-Long Study of Fiduciary Issue, SRO Idea, Gives SEC Muscle
Registered Rep | 3/15/10
Because … The year-long study will discover the same things as the SEC’s sponsored study in 2008, the RAND Report, and implications are wide ranging covering: distributor/asset manager profitability, pay-to-play and revenue sharing, open architecture, the role of gatekeepers & due diligence groups, share class pricing, and the role of wholesalers.
2) Schwab Expands Fixed Income Offerings with PIMCO Professionally Managed Municipal Bond 'Ladders'
MarketWatch | 3/15/10
Because … We can see these programs expanding rapidly across multiple channels, and in addition we would expect the availability to widen significantly with falling account minimums for ETF based programs.
3) Fidelity Investments revamps adviser sales efforts
Reuters | 3/15/10
Because … There remains a lot to be learned by asset managers about creating an appropriate sales and service model for RIA’s. A good place to start/continue learning is from observing their custodians.
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1) JP Morgan to Launch ETFs
SEC Filings | 3/10/2010
Because … The rapidly growing list of ‘soon-to-be’ ETF providers now includes JPMorgan, Eaton Vance, Legg Mason, Goldman Sachs, Russell, T. Rowe Price, and John Hancock.
2) Fund groups add inflation hedges
Investment News | 3/8/2010
Because … While some product development may be “copy cat” behavior, inflation protection is a long-term and solution oriented theme that resonates strongly with investors.
3) Fee Programs Sweep Bank Brokerage
Bank Investment Consultant | 3/8/2010
Because … Even as use of these platforms remains low, the high penetration rate of fee-based platforms within bank b/d's is an strong indicator of their future growth.
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Net sales totaled $12.8 billion during the week ended March 3, which marked the fourth consecutive week of improved net sales and brought YTD net flows up to $84.4 billion. Taxable Bond continues to dominate with net sales of $8.7 billion. YTD net inflows total $55 billion for Taxable Bond funds (or 65% of long-term industry net flows). Foreign Equity ranked #2 among the broad categories with a net intake of $3.3 billion. In each of the past three weeks net sales have exceeded $1 billion for Foreign Equity funds. Municipal Bond ($1.3B) and Hybrid ($905M) were both positive for the week, while Domestic Equity funds sustained net outflows of $1.5 billion. Domestic Equity is the only broad objective in outflows for 2010 (-$5.7B net).
Source: Investment Company Institute
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For the past five years the ETF industry has been showered with press, 99% of it positive. Alongside the ETF PR machine has been a string of truly impressive net flows – these days nearly $1 in every $3 dollars coming into the retail asset management industry is destined for an ETF. While ETF momentum seems insurmountable, kinks in the industry’s armor do exist.
- Limited Competition – There really isn’t a whole lot of it. Over 90% of ETF assets are housed at four firms. Furthermore, some of the emerging ETF players are simply restructuring their fund assets into their ETFs.
- Vanguard - It’s easy to envision Vanguard slowly becoming a dominant ETF provider with their cut rate pricing. As ETFs go retail, we think expense ratio and firm brand will be primary metrics when selecting an ETF.
- Volatility and Spreads – Normally not an issue for the vast majority of ETFs but when times get volatile spreads start widening to alarming levels. Think back to October 2008 when the majority of ETFs were trading at spreads over 50 bps, nearly five times the average.
- Index Confusion – How do you measure the market? Capitalization, price, dividend, or fundamentally weighted indexes? There are plenty of PhDs and CFAs on every side of this never ending debate.
- Gimmickry – In the industry’s short-life, 125 funds have been shelved and 9 firms have shut their doors. Remember the HealthShares Dermatology and Wound Care ETF? Or the FocusShares ISE-Revere Walmart Suppliers Index? Obviously, every industry is susceptible to fringe product development but the very short shelf life of many new ETF entrants demonstrates just how dominant the Big 4 are.
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1) The Future Of Online Customer Feedback Has Arrived
Retirement Income Journal | 3/3/2010
Because … With all the social media hype that abounds, it’s important to look at actual examples in order to help frame the value of initiatives specific to your firm.
2) Hedge Fund Assets Back At Pre-Crisis Levels
FINalternatives | 3/3/2010
Because … While bouncing back, trends in the hedge fund world such as demand for improved liquidity and transparency, less leverage, and increased fee compression, all have potential impacts that seep through to the mutual fund industry.
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Net Flows totaled $5.7 billion during the week ended February 17, which was up 188% from the prior week. Each of the five broad categories captured positive net flows led by both the Taxable and Municipal bond categories. The $2.8 billion net intake into Taxable Bond funds was the lowest number in 49 weeks, while Municipal bond funds remained steady at $1.3 billion. Domestic Equity products were flat for the week, while both Foreign Equity and Hybrid funds captured modest net inflows of $1.1 billion and $522 million, respectively. Through seven weeks of 2010, long term net sales total an impressive $60.2 billion. The breakdown by broad category is:
- Taxable Bond - $39.8 billion
- Foreign Equity - $12.0 billion
- Municipal Bond - $8.7 billion
- Hybrid - $4.4 billion
- Domestic Equity – ($4.7) billion
Source: Investment Company Institute
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Fund company websites have always catered to different industry constituents; however, the trend towards greater web specialization is clear. In a bid to serve each group's specific needs, fund companies are increasingly adding a dedicated web presence for RIAs, research analysts, plan sponsors, etc. While these sub-sites are generally a positive development, they can quickly become an administrative burden or even worse, a detriment to the end user. FUSE recommends considering the following before over-tailoring a dedicated web domain:
- Make sure the intended “special user” actually needs a dedicated web path. Are you truly offering special data/content that isn't already available to general audiences? Diffusing resources and time away from the core web-site could result in a net negative as site navigation and content retrieval become confused from the end user’s perspective.
- If you are offering exclusive data/content, why not offer it to everyone in a centralized location? Obviously, regulatory and marketing concerns need to be considered and will likely determine the proper course of action.
- Is the proposed sub-site geared toward servicing existing clients or attracting new ones? If the latter, frequent updating and real content need to be offered to attract any meaningful web traffic. Of course, with good content comes incremental cost.
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Net inflows totaled only $406 million during the week ended February 10, which represented the lowest weekly net intake in 47 weeks. Equity products sustained net redemptions across the board. Domestic Equity products suffered net outflows of $5.2 billion, while Foreign Equity and Hybrid products were slightly in the red ($447 million and $793 million, respectively). The net redemptions from Domestic Equity funds represented a 14 week high, while Foreign Equity funds had produced 18 straight weeks of positive flows.
Fixed Income products were once again positive, although the week ended February 10 was the lowest net intake for the category in 2010. Taxable Bond funds continued their dominance with net sales of $5.4 billion, while net flows into Muni funds totaled $1.4 billion. YTD net inflows into Fixed Income funds totaled $45 billion through February 10, as investors continue to allocate their money to safety.
Source: Investment Company Institute
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With almost all of the public asset manager quarterly reporting now finished, we pulled out a few interesting stats summarizing the group’s 4Q09 results.
- Valuations are attractive as the group trades near its historical bottom at 16x forward earnings. The recent market pull back has helped push the group into value territory.
- The average blended management fee stood at 46.4 bps on higher equity asset weightings
- Operating profits margins improved marginally quarter-over-quarter to 29.7% on average
- The average comp ratio in the group stood roughly at a third
Beyond the numbers, the mood among asset managers is tepidly optimistic and, as always, highly dependent on the trajectory of the market. That said, anecdotal evidence points to a modest increase in spending in the coming quarters in the form of increased advertising spend, judicious headcount increases in sales and marketing (tack on related T&E increases), and investments in previously neglected technology improvements.
Source: Barclays, FUSE, Company Reporting
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Coming off the strongest net sales year in history, the start of 2010 indicates momentum will continue for the foreseeable future. Net sales totaled $53 billion during the first five weeks, as Fixed Income funds continue to dominate, with nearly $38 billion in net flows. Taxable Bond funds accounted for 84% of net sales into fixed income.
International Equity also got off to a strong start. Net inflows totaled $10.9 billion YTD; however, net sales have dropped in each of the last four weeks. Domestic Equity funds are flat to date. The weeks ended January 13 and January 20 were the strongest for Domestic Equity flows since mid-June with net inflows of $3.6 billion combined for the period. The sales environment was less favorable in the proceeding two weeks, as net redemptions totaled $2.6 billion from Domestic Equity products.
Source: Investment Company Institute
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Fidelity’s latest competitive salvo: $7.95 equity trades and commission free trades on 25 iShares for at least the next three years. What is the impact on the industry? We have a few thoughts:
- Near-term, those retail brokerage clients pondering a switch to another discount broker will likely put down the phone. Those who already switched might have some regrets.
- Generally, the moves by Schwab and Fidelity will benefit retail ETF adoption —the barriers to entry associated with rebalancing and reallocation among ETFs have been lifted. Dollar-cost averaging with ETFs is now a possibility although one can effectively argue that no one needs to dollar-cost average ETFs given the availability of index mutual funds with low minimum investments.
- iShares couldn’t buy any better press or exposure. While iShares might not be the cheapest ETFs you can buy on Fidelity, they are the only ones you can trade commission free. The “compete at cost” ETF competitors will be hard pressed to match this partnership.
- The move will generate a migration of assets to Fidelity and impart a halo effect upon broader Fidelity services and products. However, we’d have to imagine that some NTF mutual fund assets will migrate to the iShare ETFs and negatively impact Fidelity’s platform revenue. This leads us to surmise that some sort of fee arrangement is in place to subsidize or offset any revenue cannibalizing effects of the deal.
- For the time being, it appears that Fidelity doesn’t want to manage ETFs, it just wants to make money off them. Consider the fact that commission free ETFs at Fidelity only account for 2% of the tradable exchange-traded fund universe.
We look forward to the next chapter of this story.
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In a recent survey of our client base, nearly two-thirds of manufacturer’s indicated that marketing resources were being focused on “developing materials addressing benefits of equities and diversification in long-term investing.” Despite the 160 bps YTD decline of the S&P 500, FUSE believes now is the time to act preemptively and allocate marketing resources toward diversification themed messaging. To that end, consider the following:
- Re-emphasize your target-risk lineup. Recent history suggests that post bear market net flows tend to be directed towards hybrid vehicles.
- Related to the first point, consider dusting off the Balance Fund and positioning it as a bridge back to equities for the timid.
- Think high-quality. It’s hard to believe that the low quality beta driven rally will persist through the next stage of the cycle. Rotate your proven “quality” biased strategies to the forefront of your print and web marketing.
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Nearly three-quarters of the funds in Morningstar’s Institutional Leveraged Net Long category performed below their respective category medians over the past year (through December ’09). The initial excitement attached to 130/30 funds and the like quickly faded as the markets headed south in 2008. Even since the equity market surge which began in March 2009, short-extension funds have underperformed both benchmarks and category averages. Of the 10 Morningstar rated funds, eight carry two or less stars. Poor performance and net redemptions from domestic equities in general haven’t helped the niche category’s cause, as the median AUM of the 23 fund category is $41 million. While the outlook appears gloomy, FUSE believes that short-extension strategies will endure given that:
- Strategies backed by proven stock-picker’s will eventually shine, as the markets exit one of the most volatile and irrational cycles in recent memory
- The fact that several short-extension funds have delivered in terms of both performance and sales
- The secular trend of retail advisors becoming more comfortable with short-selling
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A new year has resulted in more of the same in terms of mutual fund flows. Long-term funds captured net inflows of $23.9 billion during the first two weeks of 2010. Flows were more diversified during that period as fixed income funds accounted for $14.2 billion, while equity/hybrid products gathered $9.7 billion. In fact during the week ended 1/13/2010, net flows of equity funds totaled $5.7 billion, which was the strongest week since May 13, 2009 (35 weeks).
Source: Investment Company Institute
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The list of new and or novel mutual fund and ETF strategies continues to expand almost daily – clean energy, nanotechnology, water, Poland, Build America Bonds, FX, etc. While Fuse believes that niche ideas can be successful a number of essential ingredients are necessary for a launch to be considered successful. FUSE recommends considering the following before any niche strategy launch:
- Determine whether the idea or theme can be adequately accessed in existing strategies. For example, if you product team believes clean energy is a secular investment theme worthy of a stand alone fund, study your existing large cap lineup. If you possess a fund with a healthy weighting in energy and a proclivity to clean energy stocks your shareholders may already be participating in the trend and feel no need to “double” down.
- Ensure resources from across the organization are secured and dedicated to a successful launch. Niche strategies often require “story selling” and buy-in from marketing departments is crucial to support a successful launch with the proper collateral and web-based marketing. Concurrently, wholesalers must be convinced of the product’s viability and potential receptivity in the field with the assistance of dedicated product specialist resources.
- Right size expectations. Along with niche products come niche allocations within an advisor’s asset allocation model. Expect a modest AUM raise, as wholesaler’s fish for the biggest allocation opportunities while maintaining the “niche” story in their back pocket for those advisors that are comfortable with their existing core allocations/managers but open to new ideas to present to clients.
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Amid record net flows and historic yield spreads, 40 fixed income funds were launched in 2009. Attracted by juicy yields and a “get paid to wait” philosophy, investors poured $356B into fixed income funds. Intermediate-term bonds represented the year’s most popular fixed-income sector by capturing over a third of the category’s net flows. Given the relatively tepid forecasts for equity markets in 2010, we expect strong inflows to fixed-income funds to continue (albeit not at 2009 levels) given that (1) historically wide spreads remain (especially in high yield) and (2) the abundance of specific credit opportunities that exist for fundamental managers to unearth. Below we’ve highlighted a few of 2009’s most promising and interesting launches.
Eaton Vance Build America Bond Fund - The industry’s first bond fund launched specifically to invest in Build American Bonds (BABs). BABs represent a new form of municipal financing that seek to benefit investors by providing taxable corporate bond like income with the credit quality profile of munis.
Hotchkis and Wiley High Yield Bond – H&W’s debut of its first fixed-income offering was an impressive one. The firm poached PIMCO’s lead below investment grade managers, Mark Hudoff and Ray Kennedy, to manage the new high-yield offering.
Pimco Enhanced Short Maturity Fund – Though PIMCO launched six new bond mutual funds in ‘09, we are highlighting its Enhanced Short Maturity offering which debuted in November. The ETF represents the first of five actively managed ETFs the firm filed for in July. The timely offering represents an alternative for money market investors looking for a higher yielding option.
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There has been so much demand for our top ten list, we have decided to release the report in its entirety. In order to see the complete list, click here.
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Over the next ten days we will blog about ten trends we anticipate happening during 2010. So without further adieu here is #1:
ETFs will continue to be characterized as a competitive threat to mutual funds despite the fact that they are mutual funds. In addition, many in the press will continue to suggest that ETFs are appreciably less expensive than mutual funds (which is really just a function of index ETFs accounting for 99% of ETF AUM), until they see the fees on the new actively managed entrants. Most firms among the Top 50 will file for an active ETF, with a handful of firms launching new products. The notion that an ETF eliminates the need for revenue sharing will be challenged.
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The number 26.46% represents the 12 month return of the S&P 500 as of December 2009. Globally, the numbers are even better, as Asia, Europe, and Latin American all outperformed the US markets (except for the Mid Cap space).
What does it mean? Ultimately, strong absolute performance is typically a precursor to flows. Despite a prolonged run in the equity markets, investors’ dollars continued to be allocated to bond funds (which also produced strong absolute performance). The impact of the market decline resulted in a wholesale shift to safety. We believe investors are poised to take on some incremental risk, and this will result in 2010 being a much stronger sales year for equity products.
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The number 7.5 is a part of our recent study on product management. We asked product leaders the degree to which their organization has finished adjusted to the market correction on a scale of 1 (haven't started) to 10 (totally finished). And on average the respondents indicated their firms were moving beyond the market correction, but weren't quite finished adjusting business operations (7.5 out of 10).
Some other stats from the study reinforces the notion that most firms are now looking outward in their business efforts:
- 7% of product leaders had hired staff in the last 12 months while 33% plan to do so in the next 18 months
- 80% of product leaders indicated the need to lay of staff in the last 12 months, while only 7% plan to do so in the next 18 months.
Overall, the industry has reacted to the new business dynamics and is now focusing its efforts on investing incremental resources and innovation.
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1) Brokers As Fiduciaries: The Reality and the Issues
Reish & Reicher | December 2009
Because … There continues to be a lot of information coming out on this issue and this piece provides a good, concise view of the issue.
2) More Employers Considering Annuities in 401k Plans
401khelpcenter.com | December 17, 2009
Because … As a longer-term trend, annuities in DC as well as annuitization as a distribution option from DC could greatly affect the DC and IRA Rollover markets.
3) Ask the expert: Variable annuity changes ahead
National Underwriter | December 17, 2009
Because … Despite some knocks, the VA industry seems well positioned for growth. That said, investment managers need to reassess their approach to this market in light of the dramatic changes that have taken place this year.
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Given all the buzz surrounding the long-short category, we decided to pull out three interesting alternative tib-bits for you to consider.
87%
Represents the year-to-date (through 12/17) return of the Rebeco Long/Short BP Equity Fund. It is the #1 ranked fund and is outpacing its next closest Long-Short competitor by 3400 bps. Robeco Long/Short BP Equity has $149 million in AUM and was incepted in 1998. It has beat 99% of its Long-Short peers over the 1-, 3-, 5-, and 10-year time periods.
$30 Million
Represents the AUM raised in the Merk Absolute Currency Return Fund during its first three and a half months of existence (Incepted 9/9/2009). Merk’s stable of three FX funds are promoted primarily by the firm’s president and Chief Investment Officer, Axel Merk. The firm is focused on marketing directly to RIAs.
$800 Million
Represents the point at which TFS Capital implemented a soft close on its five year old TFS Market Neutral Fund. TFS Capital is an independent quant manager that was founded in 1997. At least 50% of each of the TFS owners' personal liquid assets must be invested in funds managed by TFS.
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Net flows totaled $5.9 billion for the week ended December 9, which was down $1.2 billion from the previous week and marked only the 5th time in 39 weeks that net flows dropped below $6 billion. Taxable Bond funds netted inflows of $4.3 billion, which was down 48% from the previous week. Municipal Bond funds captured net inflows of $1.4 billion. YTD fixed income flows total an extraordinary $372 billion.
Domestic Equity funds sustained net outflows of $1.2 billion, while the Foreign Equity and Hybrid captured net inflows of $787 million and $549 million, respectively.
Source: Investment Company Institute
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The number 52.7% represents the number of large companies, which are restoring its' 401(k) match or plan to do so according to the Profit Sharing/401(k) Council of America. In total 46.7% of companies plan or have already reinstated the 401(k) match.
The results are good news for both plan participants and asset managers. Defined contribution plans continue to be a core source of AUM for investment managers and capturing a incremental 3%+ of a participants salary will drive growth.
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Sales results were once again solid for the week-ended December 2, as net inflows totaled $7.1 billion. Fixed Income funds continued their extraordinary run with another $9.5 billion between Taxable ($8.3B) and Municipal Bond ($1.3B) products. Utilzing the ICI weekly net flow numbers, YTD net sales into fixed income flows have totaled $366 billion.
Domestic Equity products sustained net redemptions for the 15th consecutive week. Net outflows totaled $3.3 billion for the week-ended December 2. Foreign Equity funds were $991 million, while Hybrid funds sustained net outflows of $213 million.
YTD through December 2, long-term net flows totaled 353 billion.
Source: Investment Company Institute
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Over the last 15 weeks the net sales picture has been very consistent: highly positive long-term sales; Taxable Bond accounting for the majority of net inflows; Domestic Equity sustaining net outflows; while the three remaining broad categories - Foreign Equity, Hybrid, and Municipal Bond - producing modest, positive sales.
For the week-ended November 24, net inflows totaled $7.3 billion, which lagged the previous two weeks (note: there were only four business days because of the Thanksgiving Holiday). Taxable Fixed Income net inflows totaled $7.2 billion, while Municipal Bond and Foreign Equity captured $1.1 billion and $1 billion, respectively. Hybrid funds were relatively flat ($472 million in), while Domestic Equity products sustained net outflows of $2.4 billion. The week-ended November 24 marked the 15th consecutive week of net redemptions from Domestic Equity products.
Source: Investment Company Institute
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The number 17% represents the decrease in average production in 2008 versus 2007 for wirehouse reps. The statistic comes from a report by the Securities Industry and Financial Markets Association. Some other stats from an article quoting the report (click here for the article):
- Production in 2007 - $532K; Production in 2008 - $441K
- Earnings in 2007 - $211K; Earnings in 2008 - $194K
The numbers come as no surprise, but further reinforces the challenge of 2008. Despite very solid net flows, there is anecdotal information in the article, which suggests that production will be down in 2009 as well. On a positive note, fee-based advisors experienced a solid uptick in revenues from the market rally.
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Net sales totaled $11.7 billion for the week ended November 18, as Taxable Fixed Income funds topped the net sales charts once again with $8.9 billion in net flows. Over the last 36 weeks, Taxable Fixed Income funds have produced net sales in excess of $5 billion 30 times and net sales were $3 billion or greater for all 36 weekly periods.
International Equity funds captured net sales of $2.2 billion for the week, while Municipal Bond funds netted inflows of $1.3 billion. Domestic Equity products were in the red for the 14th consecutive week, as net outflows totaled $1.3 billion.
Through Mid-November, long-term YTD net flows total $339 billion. Fixed Income accounted for more than 100% of industry net sales, as net redemptions from Domestic Equity funds offset net inflows for International Equity and Hybrid products.
Source: Investment Company Institute
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It has been an incredible year for net sales. Here are some comments on year-over-year YTD sales results from the ICI (through October 2009).
- Long-term new sales are down 4.3%. Equity and Hybrid funds drove the drop, as the two categories are down 24% and 14%, respectively
- Long-term redemptions are down 26%, as all of the broad categories have experienced a decline in redemptions (ranging from 7% for Taxable Bonds to 33% for Domestic Equity)
- YTD net flows of long-term funds totaled $328 billion, while money market funds lost $490 billion
- Total gross sales (new sales + exchanges in) were nearly $2 trillion YTD through October, which lags 2008 by 3.8%
- Total gross sales (new sales + exchanbes in) into Fixed Income totaled $834 billion in 2009, which exeeds the strongest annual period by more than $125 billion
- Ratio of net sales to gross sales for fixed income in 2009 is 37%. For perspective, the ratio has topped 30% only once in the last 20 years (1992, 33%). Therefore, we are not just seeing money move from fixed income fund to fixed income fund, fundamental changes in asset allocation are being made and fixed income is capturing incremental market share.
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Net flows totaled $8.4 billion for the week ended November 11, which was an increase of 174% from the previous week. Taxable Bond funds were once again the top sellers at $7.4 billion followed by Municipal Bond ($1.5B), Foreign Equity ($1.5B), and Hybrid ($0.8B). Domestic Equity funds were negative for the 13th consecutive week, as net redemptions totaled $2.7 billion.
YTD flows for the five broad categories were:
- Domestic Equity - ($39.7B)
- Foreign Equity - $11.4B
- Hybrid - $17.7B
- Municipal Bond - $63.3B
- Taxable Bond - $274.9B
Source: Investment Company Institute
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The stat 73% represents the percentage of investors exploring a new way to grow their assets according to a survey by Prudential Financial of 1,000 people aged 45 to 70 with $100,000 or more in retirement savings.
Some interesting stats from the article:
- On average the survey participants lost more than 33% of their assets last year
- 62% feel they can regrow their savings and two thirds of this group feel they can do it within five years
- 66% indicated they will seek advise from a financial professional
We've seen the bulk of the money that was put on the sidelines in the last 12 months be shifted up the risk curve, but only slightly into short- and intermediate-term fixed income. The next step will be equities, but it will be imperative that the products are properly positioned and a sound asset allocation (liability driven) is constructed.
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Net flows were positive for the 34th consecutive week, but sales of long-term funds dropped to their lowest level during the week of November 4. In addition, net flows were less than $5 billion for only the third during in the last nine months.
Four of the five broad categories experienced a decline in net sales during the week, with hybrid funds the lone exception (up a modest $119 million to $358 million). Net redemptions from Domestic Equity funds topped $5 billion for the second time in the last 34 weeks. In addition, Domestic Equity products have sustained net outflows for 12 consecutive weeks (chart below combines Domestic and International Equity). Taxable Bond funds were once again the top asset gatherers with net inflows of $6.6 billion. Foreign Equity and Municipal Bond funds captured modest net inflows of $546 million and $899 million, respectively.
Also of note, retail money market funds produced positive asset growth (up $0.7 billion) for the first time since the first week of March.
Source: Investment Company Institute
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The number $709 billion represents Exchange Traded Product (both funds and notes) assets in the US as of September 30, 2009. The growth rates of ETPs have been extraodinary but here are a few stats to consider when looking at the ETP space:
- The top five firms, iShares, SSgA, Vanguard, InvescoPowerShares, and ProShares, account for 92% of AUM
- On a product basis: Top 10 ETPs account for 37.8%, Top 20 ETPs account for 50.8%, Top 30 ETPs account for 58.1%
- Product launches: 2006 - 145; 2007 - 232; 2008 - 198; 2009 -78. Translates into 75% of the total number of ETPs being launched in the last 45 months.
- 483 ETPs have less than $100 million in AUM (55% of the total number of ETPs).
So, while growth rates have dramatically outpaced other vehicles, the success has been concentrated. And another scaled asset manager with distribution power (Schwab) recently entered the space.
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The run of positive flows continues. It is now at 33 weeks, and during that period aggregate long-term flows totaled $349 billion. It is truly an extraordinary run of positive flows.
The flows by broad category tell a consistent story. Investors are moving glacially slow up the risk spectrum, as short- and intermediate-term fixed income continue to dominate flows. In addition, the search for yield is on, as the story of high yielding products is resonating with advisors.
Below is weekly and YTD flows by broad category:
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Week of
Oct 28
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YTD thru
Oct 28
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Domestic Equity
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-$2.6
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-$32.1
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Foreign Equity
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$1.1
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$9.4
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Hybrid
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$0.2
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$16.6
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Taxable Bond
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$8.9
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$260.8
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Municipal Bond
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$1.3
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$60.8
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Total
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$8.9
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$315.5
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Source: Investment Company Institute, $ billions
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Schwab has thrown down the gauntlet in the passive ETF space with the launch of its eight new products. The stat of the week, 8 bps, represents the cost of the two cheapest ETFs launched by Schwab - U.S. Broad Market ETF and U.S. Large Cap ETF. The cost of the eight ETFs range from 8 bps for the two broad products; 15 bps for U.S. Large Value ETF, U.S. Large Growth ETF, U.S. Small Cap ETF, and, International Equity ETF; and 35 bps for International Small Cap ETF and Emerging Market ETF.
In addition, Schwab announced it is waiving the commission cost for Schwab clients. While the cost of the commission may appear nominal depending upon the client relationship, it could be a game changer depending upon how advisors are using ETFs and the frequency of trading.
One question facing Schwab is how committed advisors are to certain indices like the MSCI EAFE and the S&P 500. The answer to this question is not yet determined.
Two facts are clear: (1) advisors like products that save at the client portfolio level (industry standard fees or very close to it for the Schwab ETFs) and (2) waiving commissions will simplify client reporting and enable an advisor to rebalance and/or trade a Schwab ETF as frequently or infrequently as they desire without concern of building commission costs to their client.
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An article in Investment News discussed the liquidation of several target date funds and it has prompted us to write a bit about the topic. Target date products exploded in the last several years, as these funds have dominated DC sales. Net flows of target date mutual funds by year are:
- 2006 - $35 billion
- 2007 - $57 billion
- 2008 - $42 billion
- YTD '09 - 26 billion
Yet, very few firms have gained traction. In 2009, Allstate, XTF, Payden & Rygel, and Old Mutual have all eliminated or are in the process of eliminating their target date fund series.
Why? Asset managers with record keeping platforms dominate the space. The top four firms - Fidelity, Vanguard, T. Rowe Price, and Principal - account for 84% of AUM.
Forty other firms offer nearly 300 target date portfolios and with total AUM of $35 billion (median AUM of $239 million, average of seven funds per firm). In addition, there are twelve series of target dates funds with less than $100 million in AUM and seven funds per series. We anticipate additional liquidations over the next 12 to 18 months, as firms struggle to obtain critical mass.
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1) Jones v. Harris: Supreme Court Hears Oral Arguments Monday
MF Directors Forum | 10/30/2009
Because … This is a case that many of us have been following for some time, and on Monday we will finally get to hear the arguments…After which, we can follow the case for three or four more months waiting on the decision.
2) Target-Date Funds Suffer From Limited Choice, Senate Panel Says
Bloomberg | 10/28/2009
Because … This is another piece of legislation/regulation that remains pretty fluid and has the potential for significant change.
3) Schwab Prepares to Launch ETFs
SEC Filings | 10/26/2009
Because … The expenses on these products arrive as industry leading (tied for the lead in some cases), and while not everyone has a horse in this race, the transformation of Schwab’s asset management business this year has been an interesting story to follow.
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Net flows were once again highly positive for the fund industry. Long-term net sales totaled $13.8 billion for the week ended October 21. The breakdown of flows by category:
Domestic Equity - ($1.2 billion)
Foreign Equity - $2.9 billion
Hybrid - $1.0 billion
Taxable Bond - $10.6 billion
Municipal Bond - $0.5 billion
YTD net sales are now over $300 billion. The Taxable Bond ($252B) and Municipal Bond ($60B) have posted their strongest net sales results ever, while equity products have suffered net outflows in the aggregate through October. 21.
Source: Investment Company Institute
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6.6 million represents the number of employed Americans who are 65 or older. Some stats that we have taken from a recent New York Times article (link here):
- There are more Americans 65 and older working today than ever before. For comparison 4.1 million were working in 2001
- The unemployment rate for Americans 65 and older is 6.7 percent versus 9.8 percent overall, but up from 1.9 percent early this decade
- Nearly half a million workers 65 years or older are looking for work. The highest level of unemployment for this group since the Great Depression
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Net Flows totaled $6.8 billion for the week ended October 14. Sales were down more than $4.5 billion (or 40%) from the previous week. Domestic Equity, Taxable Fixed, and Municipal Fixed experienced a decline in net flows, while Foreign Equity and Hybrid funds were up from the previous week.
For Domestic Equity, net outflows grew to $5.2 billion. It marked the ninth consecutive week of net outflows from Domestic Equity funds and the first time since March that net outflows exceeded $5 billion. Despite consistent gains in the equity markets, mutual fund investors continue to pull money on a net basis from Domestic Equity products.
Taxable Fixed Income funds pulled in an impressive $8.4 billion, while both Foreign Stock ($1.9B) and Hybrid ($1.4B) both topped the $1B mark for net flows during the week. Municipal Bond funds were largely flat. The $0.4B net intake represented the first time in 25 weeks that net sales of Municipal Bond funds were below $1B.
Source: Investment Company Institute
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Following a prolonged period of rumors, Invesco has agreed in principal with Morgan Stanley to purchase Van Kampen for $1.5 billion. The deal provides Invesco with $119 billion in assets under management, while Morgan Stanley gets $500 million in cash and a 9.4% stake in Invesco. It is the fourth transaction of a large mutual fund/ETF organization to be announced in the last six months (Van Kampen, Delaware, Columbia, and iShares).
We anticipated some large transactions as we entered 2009, but we also thought there would be a greater volume of small, tactical deals. With a couple of exceptions, the large organizations which have been rumored to be on the block have either changed hands or are in the process of doing so. As such, we believe most of the transactions for the remainder of 2009 and first half of 2010 will be firms adding scale to an existing product line or organizations adding incremental asset management capabilities to complement an existing suite of products.
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Net sales totaled $11.4 billion for the week of October 7, which was up 132% from the previous week and marked the 17th week of 2009 when net sales exceeded $10 billion.
Fixed income funds once again were the dominant sellers. Taxable Fixed Income funds captured net inflows of $12.5 billion, while Municipal Bond funds netted $2.7 billion.
Conversely, Domestic Equity products sustained net outflows of $5 billion. Over the last eight weeks net outflows totaled $20 billion from domestic equity products. During the same period, the S&P 500 gained 5.1%.
Foreign Equity and Hybrid funds captured modest net sales of $583 million and $564 million, respectively.
Source: Investment Company Institute
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As the Dow approaches 10,000 (Update: it closed today at 10,016), a couple of thoughts to consider for asset managers and distributors:
- Market momentum has historically been the impetus for retail investors to reenter an investment space. We believe this will happen again, and there has been some research, which indicates a milestone like the Dow reaching 10K will have an impact.
- It could be exactly the wrong time to shift money back to equities, as there continues to be some uncertainty about the health of the overall economy. Another market correction is certainly not out of the question.
- Therefore, we believe it is hyper-critical for asset managers and distributors to be an advocate for clients as they potentially shift dollars back into the equity markets. This does not mean discouraging clients from investing in equities, but we do believe most clients should gradually invest (i.e. dollar cost average) and firms should be vocal about their views on the economy.
Client trust was severely compromised after the most recent market correction (and other transgressions). Another hit would likely prove fatal to many long-term relationships between client/advisor or client/asset manager.
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Net sales of long-term funds dropped to $4.9 billion, which marked only the second time in 22 weeks that net inflows were below $5 billion.
Each of the five broad categories sustained a decline in net flows. Municipal Bond and Foreign Equity funds were relatively flat week-over-week, while the hybrid and taxable bond categories sustained a significant decline in net flows ($5B to $.05B for hybrid; $10.2B to $6.9B for taxable bond).
Domestic Equity funds were once again in net outflows. Net redemptions totaled $3.8 billion, which was the highest level of net outflows since the week of March 11, 2009. Over the past six weeks $15.3 billion has left Domestic Equity products, some of which has been reallocated to hybrid vehicles.
Source: Investment Company Institute
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The long-rumored sale of Columbia Asset Management by Bank of America occurred last week, as Ameriprise bought the equity and fixed income asset management businesses ($165B in AUM) for between $900 million and $1.2 billion. The new organization will have a tremendous amount of work associated with the integration of the two companies. Both organizations have undertaken previous acquisitions and in many ways Columbia is a comglomerate of asset managers. Some quick facts about just the two mutual fund lineups:
- Combined the two firms have 179 long-term funds
- 42 funds have less than $100 million in AUM
- Two sets of target date funds with total AUM of $162 million
- Two sets of target risk funds
- 61 funds with 3-year relative performance in the top third of their respective Morningstar category
- 15 Large Blend funds; 32 Large Cap funds
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Money continues to pour into long-term funds. Net sales totaled $16 billion during the week-ended September 23, as taxable bond and hybrid funds were the top asset gatherers at $10 billion and $5 billion, respectively.
The hybrid numbers stand out. In consecutive weeks, net inflows were $5.2 billion and $5 billion, which is more than four times the previous best week (May 6, $1.2 billion). It appears investors are reentering the equity markets cautiously through hybrid funds, although domestic equity product have sustained net redemptions for six consecutive weeks.
It is now time to look at 2009 as potentially the strongest net sales year on record. Utilizing ICI weekly numbers, net sales total $269 billion YTD. That is only $3 billion short of 1997, which was previously the best year for long-term funds. In terms of fixed-income flows, the best year was 2002, with net inflows of $141 billion. YTD 2009, bond funds have captured net sales of $227, which is 61% higher than 2002.
While momentum could quickly shift, it seems highly likely that annual flows into long-term funds will top $300 billion for the first time in 2009
Source: Investment Company Institute
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While 2009 has been relatively anemic in terms of product development with just 168 funds launched to date, managers have indicated to us that while product rationalization and pricing changes have been the focus for most of the year, product development will take center stage over the next 18 months.
Below is a quick look at the breakdown of product development activity over the last few years:
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An article in Friday's Wall Street Journal discussed the improved outlooks that analysts have for the publicly traded asset managers. Overall sentiment is fairly positive. Merrill Lynch has buy ratings on Janus, Calamos, AllianceBernstein, AMG, and Waddell & Reed. Franklin and Invesco are JPMorgan's top picks.
It should come as little surprise. The combination of highly positive flows (albeit concentrated in terms of both firm and category) with a sustained upward movement in the market has buoyed earnings at a number of firms. The table below is a snapshot of the performance of public asset management companies compared to the S&P 500.
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Net sales totaled $16.45 billion for the week ended September 16, which was an increase of nearly 125% from the previous week and represented the second best weekly flows of 2009.
Fixed income flows continue to be very strong. Net sales totaled $13 billion for the week, with $10.1 billion going to taxable bond and $2.5 billion for municipal bond funds. Net sales into hybrid funds were $5.2 billion, which is by far the strongest week for the category. Domestic equity sustained net outflows of $2 billion, while foreign equity produced modest net inflows of $0.6 billion.
Some stats to reinforce how strong fixed income net sales have been in 2009:
- Industry - $253 billion
- Taxable bond - $203 billion
- Municipal bond - $51 billion
Net sales stats for the last 27 weeks:
- Industry - $287 billion
- Taxable bond - $177 billion
- Municipal bond - $42 billion
- Domestic equity - $24 billion
- Foreign equity - $26 billion
- Hybrid - $19 billion
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In the past year, 25% of HNW investors moved some or all of their assets to a new advisor. We anticipate this trend will continue, as investors assess their current financial makeup.
Compounding the issues for advisors is the standard attrition that occurs when pre-retirees are preparing to exit the workforce and a consolidation of service providers takes place. About 50% of pre-retirees with $2 million in investable assets consolidate their providers, while an additional 20% do it around the retirement event.
The advisor who benefits from the consolidation will generally fit the following profile:
- High level of trust with clients
- Is the primary source of retirement advise, including wealth disbursement
- Models financial planning around the assets/liabilities of the client
- Compensation model is aligned with goals of the client
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What happens when investors start to pump money back into equities? The domestic markets bottomed in Mid-March at about 675 for the S&P 500. Since that time, the S&P has climbed to 1,065, or about 58%. Of course, the cash being put back into long-terms funds is predominantly going to short- and intermediate-term fixed income. Equity sales are for the most part flat, with a couple of exceptions (i.e. Emerging Markets), which means investors have missed the run-up.
We've seen a number of stories from both here and Europe where portfolio managers are starting to increase their cash positions and underweight equities, which indicates a potential dip in the equity markets. While this is to be expected, it may come at exactly the wrong time - when retail investors start to either rebalance and/or allocate new monies into equity products.
Messaging will become very important. Caution should be stressed and a gradual approach to reentering the market should be encouraged.
Standard deviation measures volatility, but retail investors care about semi-standard deviation or downside capture. Another hit to their savings, be it a 401(k), IRA, or non-qualified investments, will be very painful to the retail investor, and the asset manager and/or advisor will also feel pain by losing their client.
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Long-term mutual fund flows totaled $7.3 billion during the week ended September 9, as fixed income products were once again highly positive. Taxable fixed income funds captured net sales of $6.3 billion, while muni bond funds netted $1.9 billion. Foreign equity and hybrid funds were modestly up, with net sales totaling $462 million and $371 million, respectively.
Domestic equity products continue to struggle. Net redemptions totaled $1.8 billion, which is down from the previous week, but still disappointing considering the S&P 500 gained nearly 7.5% in the last two weeks. It is clear that investors are hesitant to put money back into equities and safety continues to be the near-term goal of all dollars moving out of cash. Research from Spectrem Group illustrates the hesitancy.
Unfortunately by waiting, many investors may reenter the equity markets at exactly the wrong time.
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The number 115 represents the number of wirehouse advisor teams that Schwab has converted to independent (Investment News story here). This represents a 53% increase from the previous year.
We've talked over and over again about the shift from wirehouse reps to independent. The wires were very aggressive in keeping their top advisors/advisory teams in place and much of the initial movement was small and mid-tier reps who may or may not have been retained. However, it appears larger, more established teams are now making the move to the independent channel.
We believe this movement is going to increase the need for advisor segmentation because the traditional approach of channelizing sales personnel will be insufficient. Firms need to construct sophisticated models, which identify the right advisors and advisory teams to work with in order efficiently allocate sales resources.
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It was one year ago today that Lehman collapsed. To-be expected, the anniversary has received a good deal of coverage including stories here, here, and a tangential story here. There has been healthy debate regarding the failure of Lehman and the role of the government in the firm's bankruptcy. Here are some stats about the industry for the last 12 months.
- As of 8/30/2008, long-term mutual fund AUM totaled $8.1 trillion. As of 12/31/2009, it was $5.8 trillion, which represented a 39% decline.
- Since year-end 2008, long-term AUM has increased by 18% and now totals $6.8 trillion (through July 2009).
- Long-term sales have been positive for 32 of 36 weekly periods in 2009.
- During the last week in February and first two weeks of March, $62 billion left long-term funds.
- During 2009 through September 2, $229 billion flowed into long-term mutual funds. If the industry were to not capture one incremental dollar in net sales, 2009 would be the 5th best net sales year on record.
And while there are many qualifiers to the last stat (dominated by fixed income, particularly intermediate- and short-term fixed income), the industry has been very resilient over the last 12 months. We believe flows will become increasingly diversified, although it may take until 2010 for a consistent up-tick in equity sales.
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Net sales were once again highly positive for the week ended Sept 2; however, both domestic and international equity funds sustained net outflows for the period. Overall, long-term funds captured net sales of $8.4 billion, with fixed income funds posting net inflows of $12 billion, while equity products sustained net redemptions of $4.2 billion (hybrid were net positive of $548M).
Net sales into taxable fixed income products totaled $9.7 billion, which reprsented an increase of 28% from the prior week and was the best weekly net intake for the category during calendar 2009.
Conversely, for the first time since March 11 both domestic ($3.2B) and international equity ($1B) sustained net outflows in excess of $1 billion. The net outflows coincided with a week when the S&P 500 was down more than 3%.
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Today marks the one-year anniversary of the launch of FUSE Research Network. It has been an exhilirating 12 months, as we have successfully:
- Launched the Market Intelligence Platform, which is our core research deliverable
- Released our first ConNext study in partnership with Mast Hill Consulting on Retirement Income
- Launched our website
- Are set to launch our first series of BenchMark reports on Product Management, Distribution, and Marketing
In the coming months we will have many more developments including:
- Advancements to the website
- Additional ConNext studies with partners who are thought leaders in sales, marketing, and product
- An advisor-driven research service
- Ongoing content development for the Market Intelligence Platform
The industry has gone through a number of challenges since the launch of FUSE but we continue to focus on our core principles of providing:
- Ardent Client Advocacy
- Absolute Candor & Objectivity
- Decision Support Research
- Incisive & Actionable Guidance
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Net flows were once again highly positive, although domestic equity funds produced a second consecutive week of disappointing results. Industry net flows totaled $10.4 billion, led by taxable ($7.6B) and municipal ($2.3B) bond funds. International equity and hybrid funds captured net sales of $1.4 billion and $489 million, respectively, while domestic equity sustained net outflows of $1.4 billion. It was the second consecutive week of net redemptions for domestic equity products, which followed a four week period of net inflows totaling $4.3 billion.
The S&P 500 was down almost one percent for the week ending August 19 (which preceded these flow numbers), so perhaps advisors and investors got skittish about the market. Since August 19, the market picked up about three percent (8/27, 1,030.98) and has since given back all those gains, as the S&P 500 closed today at 994.75. While dollars continues to flow out of retail money market funds (another $6.5 billion out for the week ending 8/26), very little is being shifted into equity products. The theme continues to be safety.
Source for all numbers: Investment Company Institute
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The numbers 156 and 395 represent the new fund launches in 2009 (156) versus the the number of funds either liquidated or merged away (395) according to Morningstar. The market decline coupled with significant outflows from equity products led to the number of sub-scale mutual funds growing exponentially. Here are some updated stats on funds which have not yet reached critical mass according to Morningstar Principia:
- 1,133 funds with less than $50 million in AUM and a 3-year track record
- 629 funds with less than $25 million in AUM and a 3-year track record
- 847 funds with less than $50 million in AUM and a 5-year track record
- 446 funds with less than $25 million in AUM and a 5-year track record
Firms need to constantly monitor their product line and measure (1) current profitability, (2) outlook for sales and AUM growth, and (3) fit with corporate image and identity. If a product does not measure up, a firm needs to seriouly consider eliminating it.
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Rydex AdvisorBenchmarking.com released its August sentiment number for advisors and it was up 9% from July to 104.05. The index now indicates a slightly positive outlook from advisors on four factors:
- Current economic outlook
- 6-month economic outlook
- 12-month economic outlook
- Stock market outlook
The trend in advisor sentiment coincides with the up-tick in the FUSE Industry Sentiment Index, which measures the 6- and 18-month outlook for investment product sales. The expectations of senior executives is highly positive, as nearly three-quarters of our survey respondents felt industry sales would increase by either 10% to 25% or 25% to 50%.
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Net flows totaled $9.6 billion during the week of August 19, which was a decline of nearly 40% from the previous week and the first sub-$10 billion week since July 15. With that said, $9.6 billion in net sales is still a very solid week.
Four of the five broad categories were positive for the week. Domestic equity was the lone exception, as net outflows totaled $924 million. Municipal bond funds were the only broad category to experience an uptick in flows (up $401 million from the previous week).
Dollars continues to flow out of money market funds. Overall, money market assets declined by $12 billion and retail money market funds lost $3 billion in AUM.
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On August 3rd, Hancock launched the John Hancock Technical Opportunities Fund. It is sub-advised by Wellington Management. According to the fund description on the Hancock website:
"The subadviser employs an unconstrained investment approach driven by technical analysis. The fund is non-diversified, which means that it may invest its assets in a smaller number of issuers than a diversified fund. The fund may invest in cash and other liquid short-term fixed income securities within a wide range (0%-100% of net assets) when the subadviser believes that the fund could benefit from maintaining a higher cash exposure, including for temporary defensive purposes."
The fund has received quite of bit of press including articles here, here, and here.
It is impressive that Hancock has been raising money in a fund with zero track record, not even a one month return. Clearly,
- Timing is very good
- The sales messaging and investment strategy has resonated with advisors
- And having a sub-advisor like Wellington helps offset the lack of a track record
Challenges still exist for products like the Hancock fund, particularly finding a place for this type of fund within an asset allocation model. However, we have seen a number of products that afford significant flexibility to the portfolio manager gaining greater traction in the retail space.
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We've seen several articles of late (including stories here and here), which pit active management versus passive strategies. This year has favored active managers, but as the Boston Globe article states the percentage of active funds beating passive products drops steeply over 3-, 5-, and 10-year periods. So while it may be tempting for active managers to tout near-term performance gains, we do not believe absolute performance represents the value proposition of an active manager.
Active management is about an investment process that provides meaningful alpha, which justifies the incremental cost to the end client. Passive strategies have captured a disproportionate share of retail sales, particularly equity dollars, over the last several years. And we believe this trend will continue. Therefore, active managers need to focus on refining both the communication and execution of their investment process because the competitive environment has reached an all-time high.
Update - here is a link to the Standard & Poors Indices Versus Active Funds Scorecard, Midyear 2009
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The week of August 12 was another strong period for mutual fund sales, as net inflows totaled $15.6 billion. Fixed income continued to dominate with net sales of $11.8 billion between taxable ($9.9B) and municipal ($2.0B) bond funds. Domestic stock flows turned almost flat, with net sales totaling only $318 million.
International equity funds produced net sales in excess of $2 billion for the third consecutive week. Over the last six weeks, international equity products have captured net inflows of $12.3 billion. YTD through July, Emerging Market Equity ($9.2B) and Pacific ex-Japan ($4.4B) were the two top selling international equity categories according to Morningstar.
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According to data from MassMutual, retirement plan participants are gradually shifting assets back into equity products. During the second quarter the allocation to equities increased from 35.1% to 38.7%, while the stable value allocation dropped from 36.3% to 31.7%. It is a reasonably subtle shift, but still an important trend, as both the tax status of the plan and the typical long-term investment horizon of a retirement plan participant both favor substantial allocations to equities.
Our analysis of weekly flows has not shown much of a shift in mutual fund sales from fixed income to equity products with the exception of last week. We'll be curious to see if flows into equity products continue to pick up or if fixed income remains dominant.
Check back later this afternoon or tomorrow morning for our weekly net flows analysis.
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Investment and brokerage firms ranked 17th of 21 leading industries and received a score of -3 from consumers based upon a recent phone survey by Harris Interactive on client satisfaction. The score of -3 is a 27 point drop compared to last year.
The survey reinforces the notion that the level of client mistrust certainly isn't isolated; in fact it has become pervasive for the financial services industry. In order to rebuild trust, we have hammered home a couple of points with clients.
- Client retention should be a mantra at financial service organizations.
- And in order to avoid an exodus of clients, firms need to have an absolute focus on client service, which includes a significant up-tick in client touches.
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Positioning of portfolio managers is tricky. There have been many instances where portfolio managers are highly marketable, vibrant personalities who are the public face of an organization and/or a fund. Bill Gross comes to mind. There is also the team approach to management, where oftentimes the organization positions the process and philosophy but not the individual managers. American Funds is an example. Is either better or worse? No. But there are certainly risks to both.
The thought of star portfolio managers came to mind following the announcement that Chuck Akre was resigning as sub-advisor of the FBR Focus Fund effective September 22. Akre filed to launch his own fund, the Akre Focus Fund, as he hopes to capitalize on the popularity of the FBR product ($835 million) and is likely anticipating a large percentage of the FBR shareholder base to shift to his fund. FBR has already named his replacements and interestingly enough has hired three members of the analyst team from Akre Asset Management to run the portfolio and become FBR employees.
Some questions to consider:
- How much money will follow Akre to his new fund?
- Many institutional investors are likely to move but will retail investors have blinders on and only focus on the track record of the existing fund, not the portfolio manager who generated those results?
- Does hiring the three analysts from Akre mitigate the loss of Chuck Akre for FBR?
- Will Akre commit to the sales and marketing resources needed to raise money in the retail space?
- Does FBR retain enough assets so that it is a better financial arrangement for the organization? (Internally managed portfolio, as opposed to a sub-advised arrangement)
- Does this become a lose/lose situation for all parties involved, as Akre has lost three analysts, while FBR has lost the primary portfolio manager on its Flagship Fund?
We'll be watching closely.
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The first week of August marked another solid net flows period for the mutual fund industry, as net sales totaled $18 billion. More importantly, net sales into equity/hybrid products totaled $6.5 billion, which represented the 2nd best week of flows for 2009 and was an increase of 64% from the previous week.
Since July 8th, the S&P 500 has gained more than 14%. During that period, net sales into equity/hybrid products totaled $12.3 billion, although only $2 billion of that went into domestic equity products. The net sales pace in 2009 has been very good; however, Intermediate-Term Bond, Short-Term Bond, and Muni National Short are the top three selling categories and accounted for 61% of industry net flows YTD through July ( source: Morningstar). The results of the past three weeks indicate that advisors and investors are beginning to dip their toes back into equity products.
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The chart below illustrates what you feel will be the outcome of the ongoing examination of target-date funds. The majority are leaning toward an outcome on the least obtrusive end of the spectrum; a call for increased disclosure and transparency of fund’s investment process, glidepath, etc., while there is a strong contingent of folks who believe that asset allocation ranges (or at least a maximum equity allocation at retirement) is a likely outcome. The likelihood of legislative actions is looked at as remote, and while a few people see an increased opportunity for absolute return funds coming out of the hearings, we think our building mates Putnam may have voted twice.
Predicting regulatory and legislative outcomes is particularly tricky as the motivational and political forces don’t always align with common sense. Still, we think in this case, the alternatives to doing much more than approaching the perceived problems from a disclosure and transparency tactic becomes very problematic to regulators. Despite what we think will be relatively minor regulatory changes, providers should not interpret this as a business as usual outcome. A couple of things to think about:
- Providers of target-date funds will be relied upon to share a greater share of the burden of educating participants about these products. Firms that can deliver their message to gatekeepers, advisers, and participants will have a competitive advantage in the evolving world of target-date distribution.
- Target-date funds, which were looking like the go to as the QDIA solution, will face stiffer competition from managed accounts, customized target-date products, and a variety of ‘balanced-like-funds’ (including absolute return products and principal protected products), as a result of perceived deficiencies following the market correction.
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The number 2,996 represents the volume of rep movement in July according to Discovery. About a third of those reps left a wirehouse firm. And amongst the nearly 1,000 wirehouse reps, 72% left the channel, with many going to an independent (18%), regional (16%), or bank (9%) broker/dealer.
The volume of rep movement makes it increasingly difficult for asset managers to segment and focus its distribution relationships. Sales management is going to have to direct behavior through metrics and compensation or wholesalers are likely to take the easiest path of resistance, and that will be focusing on existing personal relationships with financial advisors regardless of their affiliation.
So while one of the fundamental value props of a wholesaler is their network of advisors, we believe sales needs to focus on refining the number of distribution partners and obtaining deep penetration of those systems. The alternative is wide and narrow and we feel that is not a formula for success.
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According to data from Jefferies Putnam Lovell, asset management M&A deal value through the first half of 2009 totaled $14.1 billion, up significantly from the $7.7 billion seen in the first half of last year. This is a bit deceiving due to the BlackRock/BGI deal, which if excluded brings 1H09 deal value to just $.6 billion.
With a bit more stability in the market and having asset levels climbed significantly off their lows, the conversion of all the rumors and speculation should increase. Names heard to be interested in acquisitions include: Invesco, Bank of New York Mellon, Franklin, Legg Mason, AMG, Federated, and venture/private equity shops Blackstone, Fortress, and GLG Parnters. On the other end, acquisition candidates have included Morgan Stanley Asset Management, Janus, Calamos, Pzena, Waddell & Reed, Columbia, and Delaware
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Another extraordinary sales week for the mutual fund industry. Net sales totaled $12.5 billion, which is an increase of more than 14% from the prior week. Another 2.8% gain in the S&P 500 during the period contributed to flows, but fixed income products continue to dominate.
The sales in 2009 are reaching historical levels. YTD through July 29, net sales have totaled $167 billion. Fixed income accounted for all of the net flows and then some, as equity and hybrid products have suffered net outflows of more than $10 billion YTD. The best sales year on record was 1997, with net inflows of $272 billion. We do not believe the current sales levels are sustainable for the remainder of 2009, as there is typically a slowdown in flows during the second half of the year.
However, if the industry averages $15 billion per month for the rest of 2009, which is only 1/3 the sales level of recent months, the industry will approach 1993, 1996, 1998, 2006, and 2007 as one of the very best net sales year on record. Two interesting questions:
- Will there be a transition to equity products during the last five months of the year?
- Will there be greater company diversity of flows as well or will PIMCO and Vanguard continue to capture a disproportionate share of sales? Combined, PIMCO and Vanguard have captured $84 billion through June.
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In the last 24 hours we've read about major organizational changes at Merrill Lynch and UBS (as yet unconfirmed by the organization). In addition, the Merrill Lynch/Bank of America and Morgan Stanley/Smith Barney integrations are ongoing. So while we navigate through a challenging economic environment, asset managers also need to traverse organizational changes being made at their distribution partners.
Some things to consider:
- It is more important than ever to strengthen relationships with senior management. Key Accounts, National Sales, and Presidents of Distribution need to increase their visibility with their distribution partners.
- Establish a rapport with the new management team. It is very likely that a new senior manaement team is going to make changes to their direct reports, so you may need to reestablish yourself within the system if the role of your current contact changes.
- Focus on service. Any near-term service shortcomings are going to impact your relationship with the new management team.
- Be proactive. Don't wait to illustrate your value within the system.
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A recent survey conducted by Charles Schwab of 602 mutual fund investors found that only 39% had rebalanced their portfolios in the last 12 months. Some other interesting stats from the survey: 31% indicated they speak with their advisor on a regular basis and 36% indicated they do not know which mutual funds they own.
We've spoken about proactive client contacts over and over again. And this survey indicates to us that there still is a lack of client contacts from the financial services industry, be it advisors or institutions.
As a part of the client outreach, it is very important for advisors and institutions to assess the current financial situation of their clients (post crisis). Again, the survey indicates these reassements are not occuring as often as they should be or a greater percentage of clients would have undertaken some level of portfolio rebalancing.
The table below shows the breakdown in mutual fund AUM by broad asset class as of June 2009 and June 2008. The combination of outflows and depreciation from equity products over the last 12 months has led to a nearly 8% shift from equity to fixed income products. For some this shift within their portfolio may make sense but for many it will not.
Therefore, the impetus is on both financial institutions and advisors to address their existing client needs. The alternative is a declining client base.
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The Journal ran an article today about the growth of mutual funds using hedge strategies (click here for the article). Of the 132 hedge-like mutual funds, nearly half have been launched since 2006 according to Morningstar. Historically, results have been mixed at best for mutual funds that employ hedge strategies. Many have not delivered as promised, while others have been improperly positioned/marketed.
There is a place for hedge-like mutual funds but here are some thoughts to consider:
- Market these products properly. There is clearly a place for hedge strategies within the portfolio construction process. We believe research groups, HNW advisors, and packaged products like lifecycle funds will hedge a portion of their portfolio, so segmentation will be a key to finding opportunities for your hedge-like mutual fund.
- A commitment to training and education is a must. Support and messaging at the home office, research group, and financial consultant levels need to be consistent. Therefore, wholesalers, research support, and key accounts must be versed in the product.
- Don't launch a hedge-like mutual fund if it is not a core competency. Under delivering with this type of strategy has the potential to impact the overall brand of the organization, so the downside may be too great if your firm is trying to manufacture a hedge-like fund instead of leveraging an institutional capability.
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As we anticipated, net sales were once again positive during the week of July 22. The makeup of the sales favored fixed income and international equity products, while domestic equity funds were only modestly positive. Net inflows totaled $11 billion during the week, which represented the strongest net sales since the week of June 17. Taxable bond continue to dominate with a net intake of $6.5 billion. International equity followed with net sales of $1.9 billion, which marked the third consecutive week (and six of eight) of net sales in excess of $1 billion.
We were mildly surprised that domestic equity did not capture a greater share of net sales during the week, as performance during the prior week was highly positive (5%). We have been using the trailing week performance as a leading indicator of flows into domestic equity products and positive performance has consistently correlated with a positive net sales environment. Last week, there was once again a correlation although the uptick in equity flows lagged the gain in the S&P 500. Next week should be a better period for domestic equity flows, as the core indices have been consistently up, despite some mixed sentiment from both consumers and advisors.
We continue to see money moving out of retail money market products and we believe much of these dollars are going into both fixed income and equity products. Over the last 18 weeks, $159 billion has moved out of retail money market funds and during that same period $189 billion has moved into long-term funds. Clearly, money is being shifted in chunks and dollar-cost-averaged from money market products into long-term vehicles.
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Claymore announced a change to its Great Companies Large-Cap Growth Index ETF. Was it a shift to Large Cap Core strategy? No. How about All-Cap Growth? No. Instead Claymore has reengineered its Great Companies Large Cap Growth Index ETF into the Claymore/BNY Mellon International Small Cap Select LDR ETF. Claymore indicated the new strategy "expands our offering into an opportune space for long-term growth oriented investors: international small cap companies."
It is highly unusual for a firm to reengineer a fund into a completely different strategy, shifting both the market cap (Large Cap to Small Cap), as well as the regional focus (predominantly Domestic Equity to International Equity) of the product. So, while there are extenuating circumstances for this product shift, which include a very small asset base (~$3.8 million) and a willingness by Claymore to drop the management fee by 20 bps, we are more than a bit surprised the move received board approval.
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We are receiving some mixed messages from the marketplace regarding the stability of the economy.
- Consumer Confidence Index dropped from 49.3 in June to 46.6 in July, as job worries drove down the confidence measure.
- The Advisor Confidence Index, published by Rydex SGI, declined nearly 8% in July. The six-month outlook of advisors on the economy was primarily responsible for downward movement of the index.
- The Case Shiller Index of home prices rose 0.5% in May, the first monthly increase in 34 months.
The economy has made some positive moves, which have been reflected in both the equity markets and the sales environment for investment products. However, it is clear that near-term outlook remains mixed.
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Earnings reports over the last few weeks illustrate an improving environment for asset managers. We are consistently reading about organizations that are beating analyst expectations, as firms are being buoyed by surging equity markets and an improved sales environment. Some notes from the past several weeks:
- T. Rowe Price reported 2Q09 profits of $100 million or 38 cents per share, which topped analyst expectations of 34 cents per share.
- Invesco reported profits of $76 million or 18 cents per share, which beat expectations by 2 cents per share.
- Eaton Vance reported 2nd quarter earnings of 22 cents per share, which was also better than expectations (21 cents per share).
- And BlackRock, Janus, and Legg Mason all beat street expectations during the 2Q09.
So while we continue to lag the previously lofty financial results, organizations have in large part turned the corner and we anticipate further business gains in the quarters to come.
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1) 17 Percent of Plan Sponsors to Seek Out Index Funds
On Wall Street | 7/21/2009
Because … Whether it is through increased allocations to ETFs in advisor’s portfolios, or more index products within DC plans, the growing use of passive management for most firms represents a business threat.
2) Due to Strong Sales, MFS Plans to Add Analysts, Salespeople
Money Management Executive | 7/22/2009
Because … Perhaps this represents a turning point for more than just MFS following a tremendously difficult period for the industry.
3) Tax Changes Urged for Mutual Funds
The Wall Street Journal | 7/21/2009
Because … While this is currently just words on paper, they represent significant growth and profitability opportunities for the U.S. fund industry.
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Long-term funds captured net inflows of $6.6 billion, which marked the 18th consecutive week of positive flows for the industry. Four of the five broad categories produced positive sales results, while domestic equity sustained net redemptions of $2 billion. Once again, the prior week performance correlated to domestic equity sales momentum, as the S&P 500 dropped nearly 5% for the seven days ending July 8th and net redemptions for the proceeding week were $1.98 billion. Net sales into foreign equity products were $1.04 billion, while taxable and municipal bonds funds produced net sales of $6.06 billion and $1.46 billion, respectively.
During the past two weeks the S&P 500 has gained nearly 8.5%. If recent trends hold, the move up in the domestic market is very likely to result in positive domestic equity flows over the next two weeks.
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MFS announced today that Sun Life has committed $50 million for incremental staffing within MFS. Investment management and sales/relationship management are two of the functional areas receiving additional resources.
The news of an organization committing $50 million in capital for incremental staffing is a seismic shift within the industry. While most organizations have completed their internal assessment and adjusted staffing levels down in response to the recession; very few have since taken an aggressive approach to adding resources.
As firms do obtain incremental resources for staffing, here are some of our thoughts:
- Firms should be constantly measuring the impact of both individual staff and functional areas to determine ROI of the different business units (and sub-units).
- Incremental resources are going to be scarce, so a detailed business plan should be in place in order for a functional area to capture additional resources.
- Don't immediately allocate resources to functions that were previously downsized. Utilize metrics to allocate new staff.
- When trying new strategies, implement small-scale pilot programs to measure the potential business impact. The ability to illustrate some success with actual numbers will resonate with senior management, as you go through the budget/planning process for future allocations. In addition, there is far less business risk with a pilot program.
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The number 1,060 is where Goldman Sachs is predicting the S&P 500 will close 2009. It is a 15% increase from June 30 and would represent the best second half perfromance in more than 25 years. In addition, it would return the index back to October 2008 levels.
A bullish equity market would greatly accelerate money sitting in cash or cash-like vehicles back into equity products. We have seen consistent dollars flow from money market funds into fixed income products over the last 20 weeks. Over that period positive dollars have flowed into equity products but it appears much of that money is a reaction to near-term market results, as there is a correlation of inflows versus outflows and market conditions. A sustained period of positive performance will likely mitigate investor uncertainty, which would lead to a consistent period of postive flows for equity funds.
We are still a long way from returning to past AUM and revenue levels, as if Goldman is right about the direction of the S&P 500, the index would still be nearly 500 points behind its peak level of June to October 2007. But, market conditions do appear to be moving in our favor.
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Whether from a financial engineering perspective, or simply a marketing angle, we hear a lot of discussion on the failing’s of asset allocation, or more precisely, the failings of someone else’s version of asset allocation. These are similar discussions to what we heard after the tech-bubble burst, while then it was a “lack of diversification” and now it is a “lack of proper diversification.” The result of the discussions last time was tremendous growth of asset allocation funds and other managed allocation portfolios, and the massive growth of international equity, REIT, and natural resources (some would say performance chasing disguised as an effort to diversify). This time around, there is the chance that some equally transformational trends take hold as a result of these discussions.
- In terms of ownership of process, we have seen and heard evidence of advisors taking back control from the home office as in the case of full service B/D’s as well as RIAs moving portfolio construction duties in-house away from previously outsourced consultants or strategic asset allocation specialists. We believe that these trends will be relatively short-term in nature as the challenges associated with the asset allocation and due diligence processes will push a large segment of advisors to seek to completely outsource these functions over the longer term.
- From a product perspective we expect a few trends to develop or accelerate. First, we expect a lasting effect on allocations to true diversifiers (stocks/bonds/cash) and a pull back from ‘diversification light’ (US Equity, International Equity, etc). Secondly, increased usage of core & explore and tactical asset allocation models, will facilitate a greater demand for both unconstrained funds as well as alternative strategies.
For asset managers, product knowledge strength in the sales and marketing areas is a powerful driver toward taking advantage of both the opportunistic short-term trends as well as aligning sales and service models for strategic long-term growth.
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1) Columbia Sale May Complete in Days
Mutual Fund Wire | 7/17/2009
Because ... it is another large transaction within the asset management space and we believe a precursur to more deals.
2) What's So Absolute about Absolute Return Funds
Morningstar.com | 7/14/2009
Because ... it is a fairly scathing article about the inability of absolute return funds to perform as planned.
3) Advisers Rethinking Traditional Asset Allocation
Money Management Executive | 7/14/2009
Because ... you need to know how advisors, consultants, and research groups are constructing portfolios in order to properly position your products as a part of those solutions.
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Coming off of a week of solid upward movement for the S&P 500, net sales of equity products were once again positive with a net intake of $3.5 billion. Over the past five weeks, net sales of equity products have been highly correlated to the performance of the prior week. It is too short a time period to believe the trend is highly predictive, but it does illustrate how sensitive investors are to market conditions. Our guess is the correlation trend will continue, as a 5% drop in the S&P 500 is likely to result in a pullback in equity sales.
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A recent run of underperformance has led to some press coverage of the CGM Focus Fund. The fund produced extraordinary results between 2000 and 2007; however, it badly underperformed in 2008 and continues to slump in '09. Compounding the issue, $2.6 billion was invested in the fund in 2008, which means a substantial percentage of shareholders participated only in the downside of the strategy.
So what is a firm to do? Despite being painful and difficult, we firmly believe in maintaining a consistent process and message. From a sales and marketing perspective, the firm needs to aggressively stay in front of clients and reinforce why the investment process works. For a fund like CGM Focus, it is inevitably going to produce periods of both excess performance (7400 bps above the S&P for 2007) and under performance (1100 bps below for 2008); but over the long term the process will deliver high levels of alpha.
When organizations run away from under performance or move to reengineer a fund too quickly, it can negatively impact the credibility and image of both the organization and the sales force. Therefore, firms need to proactively address the issue and stand behind an investment process they believe will deliver for clients.
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MainStay has reached an agreement to adopt four funds from Epoch Investment Partners. In large part it is a typical fund adoption with a couple of notable exceptions including:
- It is atypical for a firm to "adopt out" funds with $750M in AUM.
- MainStay is also taking on the separate account distribution responsibilities for Epoch.
Of greater interest is the fact that adoption took place at all. Fund adoptions had slowed to a crawl, as those funds with good track records and a lack of scale were aggressively targeted and acquired. However, recent market conditions have resulted in a significant despreciation of assets and asset managers continue to navigate a challenging sales enviroment. Both of these factors will lead to the next phase of firms that must decide whether to continue their fund businesses or look to exit it through acquisition.
For example, there are currently 325 funds with 3- and 5-year relative performance in the top third of their respective category, but manage less than $75M. And while many of these funds are not adoption candidates, that is a significant volume of funds that lack critical scale yet have a highly saleable track record.
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One of the challenges facing asset management organizations today is institutional uncertainty. We have heard rumor after rumor about senior management changes, organizations for sale, and reorgs at firms. A recent Ignites article included a survey by KPMG, in which 65% of investment executives indicated that senior management lacked vision. That number jumped to 90% among US respondents. While both numbers seem high, particularly the US number, it is an indictment of the lack of innovation within our industry but also a lack of communication.
It is imperative that firms obtain strategy buy-in across the organization or execution will fall flat. One of the biggest mistakes that asset managers can make when working with a distributor is when a firm “goes into hiding" following a negative event at the organization (i.e. performance issue, PM turnover, etc.). Well, the same can be said internally when an asset manager experiences a highly challenging environment, like the one we have experienced for the last 12 months, and changes need to be made (or are made) but the flow of information is closed.
Today it is more important than ever for senior management to focus on open lines of communication to both their internal and external constituencies, as this will help minimize any institutional uncertainty.
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1) Less Than Half of Adults Think Financial Services Firms Put Investors First
Money Management Executive | 7/7/2009
Because ... Trust is the biggest driver of share of wallet, and while most providers think they are trustworthy, this research as well as our own show clearly that investors have doubts.
2) Russell Seeks to Launch ETFs
IndexUniverse | 7/9/2009
Because ... The next generation of ETF providers are not niche startups and it's time to figure out if the market is an opportunity or a misadventure for you.
3) Lower Profits, More Mergers Seen for Mutual-fund Firms
MarketWatch | 7/9/2009
Because ... Whether or not our industry has truly been permanently transformed or not, there are a number of long term issues stemming from the credit crisis and working toward understanding them is important in taking tactical and strategic actions to get back on track.
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Net sales were highly positive during the week ending July 1; however, equity products suffered modest net outflows for the second consecutive week. The net redemptions from equity products followed two consecutive weeks of negative returns (-3.0%, -1.1%). Since the S&P 500 peaked in 2009 (946 on June 12), the market has dropped nearly 7%. This does not bode well for near-term flows of equity funds, as investors appear to be hypersensitive to market conditions.
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As a follow up to our blog yesterday on potential job changers post recession, we thought we would revisit a survey we conducted on how job attrition would impact different functions at asset managers. The chart below illustrates which business functions you felt would be most affected by staff reductions. There were two standouts: product/marketing and sales. As a general rule, the survey results coincide with what has happened in the last nine to 12 months. However, while firms have realigned their headcount to coincide with revenue numbers, functional responsiblities have either stayed the same or potentially increased. Therefore, the strain on existing staff has grown.
As of today, most firms have completed the internal review of their operations and have turned their focus on growing their business. This will eventually lead to hiring incremental staff, as the business environment improves. We feel that firms should take this opportunity to assess their organization and resource allocation, as there are opportunities to gain efficiencies and obtain a greater ROI on their sales and marketing outlays.
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A recent survey by Adecco Group in the Atlanta Journal Constitution had some very interesting statistics about the impact of the economy on employee retention and retirement.
- 54% of US workers said they are likely to look for a job once the economy rebounds
- Nearly three in four of the youngest workers (ages 18-29) are likely to job hunt when the recession ends
- 44% of workers older than 60 have been forced to delay their retirement
- About 20% of Americans say they are saving money in case of a layoff
Our industry has been one of the hardest hit by the recession. Universally, there has been attrition in headcount and many retained employees are constantly concerned about the stability of their job. Salaries, bonuses, and commissions are all down compared to previous years. Many of the statistics that are quoted from the Adecco study are likely to translate to our industry.
Therefore, it is important for senior management to maintain their commitment to employee development. We believe training and education is an invaluable tool for building employee loyalty. This commitment will also resonate externally, as the firm's image and identity will take on the personality and culture of its staff.
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Today's Journal had an article (click here for the article) on investors pouring money into both ends of the risk spectrum - core bonds and "high octane vehicles like emerging market companies, commodities, and junk bonds." A look at the top ten selling categories through May illustrates the author's point, as six core bond categories ranked in the top 10, while High Yield, Emerging Market Equity, and Natural Resource products are also amongst the ten best sellers.
However, dig a little further and we see the great majority of money flowing into an isolated group of managers and categories. Intermediate-Term Bond funds have captured net inflows of $41 billion, which more than tripled the #2 ranked category (Short-Term Bond). Of the $100B in net inflows for 2009, Intermediate-Term Bond and Short-Term Bond accounted for 55% of net sales. At the firm level, Vanguard and PIMCO accounted for 66% of net sales through May.
Overall, we are seeing some dollars transitioning into higher risk categories; however, in large part money is flowing out of cash and into conservative fixed income products. We do anticipate the market share of equity flows to pick up, but we are at least months away from high alpha vehicles outselling core fixed income.
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Following a two week drop in the equity markets of nearly 5%, sales of equity and hybrid funds have once again turned negative with $611 million in net outflows. Sales of fixed income products were solid, but the $3.3 billion dollar net intake represented a 15-week low. Despite the dip in long-term flows, retail money market funds assets were down another $6 billion during the week of June 24. Overall, the sales environment has stabilized; although there is still some sensitivity to near-term market results.
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There is talk today about the lukewarm bids that Bank of America has received for Columbia. There are many challenges associated with M&A activity in the asset management space because of the unique nature of the business. Integration is difficult, and at an organization like Columbia, it is even more complicated because the firm itself has undertaken multiple acquisitions throughout the years. According to Jeffries Putnam Lovell, transactions were down by more than a third in the first quarter compared to 1Q08, with divestitures accounting for 51% of the transactions in 1Q09.
We do believe transactions can work; but here are some questions to consider:
- Deal Structure/Cultural Fit - will integration be possible or will the new organization be complementary and need to maintain its independence? Also, what are the ultimate goals of the acquiree - do they want to stay in the business or is this purely a strategy to monetize their company? Often the value of the organization is in the senior management and a lot of equity, institutional knowledge, and relationships will walk out the door with the senior management team.
- Fundamental Value Proposition - as a general rule firms are acquiring a revenue stream via AUM and investment management capabilities via a defined, repeatable investment process. Do these processes and capabilities fit with the near- and more importantly long-term strategy of the acquiring firm? It is imperative that product and sales be in synch; therefore, the new firm's capabilities must fit your distribution strategy.
- Secondary Value Proposition - outside of asset management capabilities and AUM, are there sales, marketing, operational capabilities, etc. that can be leveraged and potentially provide economies of scale? For a new entrant in the space, the secondary value prop may be as important as the investment management piece.
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According to a survey by PricewaterhouseCoopers of 238 wealth managers, client attrition was between 6% and 10% during 1Q09. We anticipated significant client movement amongst the advisor ranks and the survey reinforces this notion. We are in the process of recovering from a prolonged bear market, which did not spare any equity asset class. And the bear market has resulted in many clients reassessing their financial situation and potentially making major lifestyle changes.
Our research indicates that near retirees begin to assess their financial needs in retirement following a life event, which may be as simple as a birthday or as impactful as a death or illness. What typically follows is a consolidation of providers. We believe the recent market was a life event for a large percentage of investors including the core workforce, pre-retirees, and retirees; and those relationships which are lacking in trust or service are likely to be lost to another provider.
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Seems about right. Unfortunately, it will not result in any more money being returned to the victims of the Madoff scandal, many of whom had invested their entire life savings either directly or indirectly with him. From an industry perspective, it is imperative for client service personnel - advisors, call centers, internal reps, etc. - to be prepared to answer questions about the integrity of their business. Firms need to proactively promote their organizational principles and values, because the industry has been marred with a series of transgressions in the past decade.
Trust is an overriding factor in capturing and retaining client assets. Our research indicates that those individuals and/or firms with the highest level of trust capture as much as 20 percentage points more in wallet share compared to those with just average trust ratings.
Now more than ever, clients are going to question their investment relationships. Many have seen their asset base drop by more than a third and the industry has been hit with a series of negative pieces - Madoff, performance of target date funds, Stanford Financial to name three - therefore, trust has been shaken to its core. Increased client contacts through multiple touch points (phone, email, web, in-person) should be a strategy of every firm in the next 18 months.
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1.) Survey: Ranks of the Rich Thinned in 2008
Investment News - 6/24/2009
Because ... the number of high-net-worth individuals in the United States with net assets of at least $1 million, excluding their primary residence, fell 18.5% in 2008 to 2.5 million, from 3 million in 2007, according to the annual World Wealth Report. Click here for the report. Clients of our Market Intelligence Platform will see the report in our synthesis of HNW and other topics.
2.) Institutional Managers Coming Cautiously Back to Equities
Plan Sponsor - 6/19/2009
Because ... institutional trends are usually a good leading indicator for the retail space.
3.) Big Apple Shop Converts HF to Mutual Fund
Fund Action - 6/22/2009
Because ... you should know Bull Path Capital Management is about to convert one of its long/short hedge funds into a long/short equity mutual fund.
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The mutual fund industry continues to see movements from cash into long-term products. While fixed income has captured the majority of the money, equity products have also experienced solid net flows. In the past 14 weeks, net flows into equity products have totaled nearly $50 billion. In addition, in nine of those 14 weekly periods, net sales of equity/hybrid funds have exceeded $3B.
During that same period fixed income funds captured in excess of $100B in net sales. Therefore, two out of every three dollar is being allocated to bonds. We anticipate greater balance between fixed and equity products as the weeks proceed due to increased confidence in the equity markets and a concerted by advisors and research groups to reallocate large cash positions back into equity strategies.
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Merrill Lynch and Capgemini released their annual World Weath Report (2009) and as would be expected the numbers are jarring. Wealth declined to 2005 levels, as the number of HNW investors ($1 million in investable assets excluding primary home) fell by nearly 15% and the ultra-HNW ($30 million plus) dropped by nearly 25%. What is clear is that those in the top one percent of wealth were not immune to the global economic conditions despite being privvy to the most sophisticated financial advice and investment solutions. The chart from our Retirement Income study (click here for more info) below segements investable assets using public sources and our projections (FUSE and Mast Hill Consulting) predict it will take years to return to mid 2008 levels.
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According to Lipper 208 funds have been eliminated in 2009, which is well ahead of 2008 when 282 funds were either merged into another product or liquidated. We anticipate the pace of fund mergers/liquidations to pick up over the next several years as firms eliminate products which are unprofitable, non-core to the organization, or are redundant to another fund in the lineup. According to Morningstar there are currently 7,700 mutual fund portfolios. Some stats to consider:
- 771 funds have less than $10 million in AUM
- 394 funds have less than $10 million in AUM and a 3-year track record
- 1,483 funds have less than $50 million in AUM and a 3-year track record
It is very difficult to create and market unique products, as the industry is satiated with product strategies. Firms need to deliver their core capabilities and provide meaningful value to their distribution partners. If strategies are not doing this, organizations need to understand the potential implications to the overall brand of the firm. We believe fund eliminations will significantly outpace product creations as we move forward.
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We've seen reports that indicate that passive investing and/or the growth of ETFs will subside as the economy stabilizes. That bear market demand for ETFs must be separated from a fundamental shift in tastes. We firmly believe that there has been a transformation in portfolio construction at the retail level, which includes a greater allocation to passive strategies. ETFs have been the beneficiary of this shift. In addition, we believe this transition is not temporary and is likely to accelerate over the next decade.
Advisors and research groups have become increasingly sensitive to fees. They have increased their allocation to passive strategies in a defensive measure in order bring down the overall cost of the portfolio without compromising their fee levels. In addition, asset classes which offer greater market efficiencies and are therefore more difficult to achieve alpha will receive greater allocations to passive strategies. It is not purely altruistic motivations that are driving this shift; instead it is a combination of a true belief in a core/satellite approach and a defensive strategy to maintain the advisory fees of the distributor.
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Thirteen weeks and counting. During that period, $139 billion dollars has gone into equity and fixed income mutual funds, while $124 billion has flowed out of retail money market funds. We believe, in large part, the movement out of the retail cash products has directly contributed to the flows into long-term funds. Another encouraging sign for the industry has been the uptick in equity flows over the past two weeks. Net sales into equity funds (domestic, international, and hybrid) exceeded $5 billion in each of the past two weeks.
Barring a steep drop in the market or a highly negative reaction to the potential financial reforms, we think the industry has turned the corner and long-term sales will continue to accelerate.
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We are constantly probing our clients and industry experts for their thoughts on different trends in the industry. Our recent survey asked about the percentage of intermediary sales that will be derived through models. About two-thirds of the respondents felt that in five years models would account for 50% or more of intermediary sales. We are firmly in the camp of the majority because:
- Distributors want consistency in portfolio construction, manager selection, and risk-profiling and the only way to obtain this is through models built by research groups
- Many advisors are focusing their efforts on non-investment services particularly for their HNW clients
- Distributors continue to build out their research capabilities in order to recruit reps from competitors
Near-term, we have seen some movement away from models. Some advisors have taken back the investment decision process from the research group, but we think this is in large part due to the economy and it is not a long term trend.
For asset managers, the growth in models should lead to a change in sales strategy. A scaled effort at the home office/research group of distributors with CFA-quality client service personnel will provide significant value to an organization. We also believe firms need to target research groups at bank trust departments and within a large team at a wire or an indepenent RIA. In order to do this, firms need to commit to training their sales personnel on the investment philosophy and process of their organization. The next generation of wholesaler needs to be deep in the organization's investment philosophy and investment process is going to be at the core of most sales and marketing activities.
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An interesting article today in the WSJ Blogs (link here) discusses the disconnect between advisors and their HNW clients. The article noted that 80% of advisors feel they are doing a good or very good job amid the financial crisis for their clients, while only 30% of their clients agree and another 30% actually feel they are doing a poor or very poor job. For us, the satisfaction with handling the financial crisis in many ways is a secondary factor for how financial advisor should manage a HNW client relationships. The needs of the ultra wealthy go far beyond managing an investment portfolio. Advisors who help their clients with issues like:
- Security services
- Art collections
- Automobile collections
- Estate needs and planning
- Emergency services
- Travel needs
will build so much goodwill that in many ways the success of their investment portfolio will become ancillary in all but the worst conditions. It is a service business and advisors that embrace the needs of their client will build goodwill, trust, and ultimately incremental wallet share.
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$2.7 trillion is the combined AUM of BlackRock and BGI. It will be the largest asset management organization in the world once the transaction closes. It has been estimated that more than $500 billion of the assets are retail in nature including about half of iShare's $300 billion in AUM. A number of questions come to mind following the announcement:
- How complicated will the integration process be? (our guess, highly)
- Are the product capabilities complementary? (on the surface, it seems like they are)
- Will this afford BlackRock further penetration in the Merrill Lynch system? (remains to be seen)
- How will the passive, quantitative, and active strategies be packaged? (remains to be seen)
Overall, the BlackRock/BGI combined entity will have huge scale advantages over all but a handful of competitors. We believe it will be a long and complicated integration process; but once it gains momentum, the combined organization will be amongst the most powerful asset managers in the world.
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Once again we had positive week of flows. Fixed income products continue to account for the majority of net sales, but we did see an uptick in equity flows over the previous week. Coinciding with the positive momentum is a continued upward movement in the equity markets. Industry sentiment is improving due to an increase in consumer confidence. As a result, we believe advisors will start to rebalance client portfolios away from cash into equity products in the next six to 12 months, which will further boost momentum.
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While the attention to fixed income investing has brought bond funds into the spotlight, it doesn’t take us long to find problems fund firms should address when presenting fund information.
A big issue is how to maintain web content consistency. As an example, we researched a fund and it is described in the Overview section as an investment targeting the 10 to 15 year maturity range; the Morningstar Style Box indicates the fund actually falls into the intermediate duration group. Furthermore, a quick check of the portfolio statistics reveals that the fund had almost half of its holdings in short term issues and less than 10% in long term issues. When we dug deeper into portfolio holdings, we also found many bond funds have recently loaded up on mortgage-backed securities even though they normally do not intend to invest heavily in this sector. While a fund manager can have the leeway to deviate from the stated strategy of the fund, an inconsistent message can severely challenge the sales process. For firms with less experience marketing fixed income products, an effective fix can be as simple as gaininga better understanding of the process ‘market-data-vendors’ utilize for collecting fixed income portfolio characteristics, which is much different than the process for equity products.
The inconsistency even exists within the same marketing documents. For example, a bond fund fact sheet shows the portfolio’s Morningstar Intermediate-Term category along with the Short-Term style box. Duration is one of the most important measures of a bond portfolio.
The problem with conflicting information seems widespread regardless of firm size. We suggest product managers conduct a thorough cross-check of their various marketing materials to make sure a fund is consistently presented. If any deviation is allowed, disclosures to clarify the divergence should be placed in a prominent position so that investors are not confused. More importantly, accurate information needs to get into the hands of the sales team, advisors, and due diligence teams.
Jing
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The mutual fund industry has seen nearly $100 billion flow back into long-term funds over the past nine weeks. In the past two weeks (ended 5/13/2009), more than $30 billion dollars has flowed into long-term funds, including nearly $10 billion into equity products. Does this mean we have turned the corner? We believe the industry is poised for some sustained positive momentum. The S&P 500 bottomed-out on March 9th at 676 and it closed today just over 900, which represents price appreciation of nearly 34%. Investors have consistently seen positive movements in the market over the past 10 weeks, which has led to small pockets of money flowing back into equities. Safety continues to drive the bulk of flows into fixed income products; however, we anticipate an increased share of flows going into equity products, as advisors/research groups look to rebalance portfolios. There continues to be an uncertain sentiment hovering over the global economy, which is going to impact the pace at which money flows back into equity-oriented products, but we believe the worst is behind us.
Source: Investment Company Institute
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Cash is taking a bigger role in household investable assets on two fronts. Short-term, and most prominently, we have seen a rapid flight to cash as a place to hide from the risks of the equity markets. To this end, money market fund assets held by U.S. households hit $1.5T at year end, a 17% increase over the 12 month period. This represents a 2% increase in the total household allocation to money market mutual funds from 4.2% to 6.2% of investable assets. Still, the temporary nature that many of these assets represents can be seen in the fact that while household money flowed to funds, their bank equivalents - money market deposit accounts - were relatively flat during 2008 experiencing about a 1.5% increase in assets. Longer term, household’s allocation to cash products has been growing slowly, but steadily, climbing above 20% at the end of 2007 and pushing 30% today reflecting the depreciation of equity. Even with low returns on cash and a more stable equity market, many are predicting investors will remember the pain of 4Q08 for a long time, and that allocations will remain over-weighted (relative to pre-crash levels) to cash and fixed-income products for an extended period. The macro implication is negative for manufacturers of equity products. Mitigating this somewhat, our analysis indicates that over 50% of this lowering of equity allocations will manifest itself in the form of decreased holdings of individual stocks. Still, it seems likely that when cash does start to move, the intermediate capital structure products (municipal bonds, limited- and intermediate-term fixed income look to be the winners in the short term.
Sam
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Invesco PowerShares just announced the plan to shut down 19 ETFs, on the heels of Northern Trust liquidating its 17 ETFs in February. In the past year, more than a handful of ETF providers exited the ETF business completely.
Until the end of 2007, the industry enjoyed a 10-year annualized growth of 57%, but we wondered if the growth spurt in the recent couple of years was sustainable. The record number of liquidations in 2008 (50 vs. 11 in eight years from 2000 to 2007) served as an awakening for those who assumed “a rising tide lifts all boats”. In a market inundated with ETFs covering almost every investable index, the abundant supply eventually leads to investor confusion with differences between similar products as well as how to effectively use these tools in their portfolio construction. Most ETFs had less than $5 million in assets at the time of their closure, which indicates the difficulty of attracting attention in this crowded marketplace. A quick review of shuttered funds also reveals that some ETFs concentrated on niche sectors that turned out to have too narrow of an appeal.
Because of ETFs’ low expense ratios, a sponsor has to gain scale to stay in the business, which is particularly hard at a time when so many companies are feeling the pinch of the market slump. We believe more consolidations are on the way, but there is still room to grow in this industry. Expect ETF sponsors to be more deliberate about product evaluation going forward, cutting through the hype and attempting to deliver usable tools to their investors.
Jing
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We've long heard the arguments of active versus passive. Recently Standard & Poors published a report on the inability of active managers to outperform their benchmarks. And the percentage of underperforming products is fairly staggering; however, market cycles can affect the level of underperformance in these types of studies (although typically passive wins). This inability of active management to deliver is one of a number of factors that has led to passive products capturing incremental market share in the retail space. Two examples of increased usage are:
- Advisors utilizing passive products for a beta play, but to also lower the overall cost of the portfolio as a defensive measure in order to maintain their fees
- Manager research teams increasingly implementing passive products in the portfolio construction process - particularly in a UMA-like environment.
So what is the meaning to active managers? We believe that those managers with sound investment processes, which produce meaningful alpha will always be in demand and have the ability to command a premium in the market. Those managers who are largely beta plays in a core category like large cap will not capture premium pricing and are likely to be unseated by passive strategies or low cost, low tracking enhanced products (i.e. quant). Packaged products like lifecycle are also going to increasingly utilize passive strategies because of increased fee pressure.
Therefore, long-term asset managers need to (1) refine their product offering to suit their distribution strategy and the demands of the marketplace, (2) adjust their fees as need be to be competitive, and (3) be able to articulate their value proposition as a manufacturer - and investment process will be at the foundation of that value prop.
Mike
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Market instability continues to restrain sales of equity products. The near-term momentum of January was quickly overcome in February and the first two weeks of March, as more than $40B flowed out of equity products. However, the S&P 500 gained more than 10% between March 11 and March 18. Only one week later, weekly net flows of domestic equity products topped $2.6B. This was followed by weekly net intakes of $2.9B and $2.8B into domestic equity funds. Will this momentum continue?
Doubtful, as we've seen a move of nearly 30% up in the S&P 500 since the market bottomed out; yet we still see quick shifts of money in and out of the equity funds during that period, as advisors/investors react to near term market moves. The instability in the sales environment will continue, as there is still significant skepticism around the soundness of the global economies.
Mike
Source: Invesment Company Institute
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There has been a lot of attention recently placed on social networking, websites, Web 2.0 technologies, and the generally low incidence of asset managers embracing these tools. As I have picked up anecdotes in conversation, it seems to me that these generalizations may be similar to the typical observations around advice offerings within DC plans. The statement goes something like “only 20% of participants access advice tools where they are available,” but in reality, it’s the solution that’s the problem, not the delivery of the solution. And if analyzed a bit deeper, it turns out that advice is reaching a high percentage of participants for whom advice tools are a viable solution, and further, it’s contributing to a positive outcome. The point from my perspective is that many firms are exploring and executing on a wide range of these activities, but that it’s focused on narrow and often unique processes/challenges/behaviors and thus not as easily identifiable. Further, I think the thesis that broad and rapid adoption by asset managers could reshape the competitive landscape is a bit dramatic. That being said, I do think there is something to the deaf-ears argument in that a heavily regulated industry and a high level of financial comfort with business-as-usual policies certainly doesn’t encourage asset managers to be early adopters in this space even in the face of valid arguments to the contrary.
Sam
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We just met Jeff Margolis and felt an immediate connection given (1) his years of practical experience in distribution and (2) his views on what it will take to gain / sustain a competitive advantage…
Investment management firms are experiencing a period of upheaval and unprecedented events which are putting tremendous strains on their ability to operate successfully and profitably. This environment is putting a premium on efficient and effective execution. More firms fail from poor execution than from improper strategy and planning. The main cause for this poor execution is lack of involvement and ownership by senior management.
In order for investment firms to be successful, particularly in this challenging environment, they must link strategy and planning with execution in a continuous rather than linear process. Management must operate in the trenches with staff to understand execution hurdles each day. They will then be able to react in real time to adjust plans accordingly and quickly overcome hurdles. Integrated and communicative firms with strong cultures, rather than hierarchical and bureaucratic firms, typically operate in this way.
Jeffrey Margolis / www.margolisadvisory.com
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Target-date funds, once hailed as being a major contributor to the improvement of the U.S. defined contribution market, have been getting drubbed in the media as well as in some regulatory circles for having failed miserably to deliver on their promises. While the market correction may have pointed out some stark contrasts among providers, as well as highlighted some issues manufactures can work toward addressing, when taken in whole it serves to strongly suggest that as a product concept, target-date funds are indeed part of the solution.
A few things to consider: Pre-crash, according to Boston College’s Center for Retirement Research (CRR), the average 55-64 year old held $78k in 401(k) and IRA balances , which translates to around $56k today, quite a hit. However, that same person should have balances totaling $230k post-correction based on CRR’s simulation. While components such as participation in a plan and the deferral level at which people participate account for some of this shortfall, poor investment decisions are also a key factor; something target-date products solve.
On the other hand, there is the argument that target-date funds exposed investors to too much equity risk, with the average 2010 fund experiencing a -26.2% return for the six month period ending February 28th and holding an average of 44% in equities. According to the ICI/EBRI, only in DC plans that offer stable value products and do not contain company stock (23% of DC assets) do we find an average equity allocation for participants in their 60’s that is lower than the equivalent target-date product. For all other combinations, equity allocations are in the low 50%’s for 60 year olds. Numbers from Vanguard (YE 2007) go even further showing that participants from 55-64 on average hold 67% equity (Average target-date equivalent equity exposure of 44% - 59%).
This is not to say there are not improvements to be made, but all else being equal, DC participants would be better off today if target-date funds had represented 60%-70% of DC assets opposed to the 6%-7% of DC assets (even less of older participants) pre-crash.
Sam
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There has been significant criticism of the asset management industry during the recent economic crisis. People have questioned the suitability of lifecycle funds, asset allocation, fees, pricing, portfolio construction, and even the long-term viability of mutual funds. I've seen a report that indicates that the numbers of funds could drop by as much as 70% because investors were burned during the market decline and money will transition into other, more suitable vehicles like stable value, annuities, cash, bank deposits, fixed income, and exchange-traded funds. In addition, the report asserts that separately managed accounts (SMA) and unified managed accounts (UMA) are more suitable vehicles than lifecycle funds in a steep market decline. I have a number of problems with these conclusions including:
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Lifecycle funds will certainly come under criticism for an aggressive glide path; however, not long ago pundits were criticizing more conservative products which underperformed during a prolonged bull market. Lifecycle products certainly are not a perfect product but it is a better solution than 401(k) investors selecting their own portfolios. We do foresee changes in lifecycle products including customized managed accounts at the upper end of the market and the adoption of tactical asset allocation for at least a component of the portfolio.
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The structure or vehicle type has no impact on the suitability of a product in a down market. If a person is invested in an SMA or UMA, the only way they avoided the downturn would have been from a tactical move away from equities. An equity SMA is going to be fully invested and a UMA will provide a series of products but it would take a tactical move by either the research group, the advisor, or the end client to move out of equities. An investor in a lifecycle fund can move to cash at the close of any business day if they so choose or get the advice to make this move.
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According to the MMI, 80% of SMA assets resided in equity or balanced portfolios. I don't have the corresponding performance but my guess is that these portfolios produced negative performance that was highly correlated to respective mutual funds.
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ETFs are by-and-large an equity vehicle. More than 75% of ETF assets reside in equity products, so the real threat of ETFs comes from the active versus passive question, not mutual fund versus ETF.
We do believe active managers who are not able to produce, communicate, and repeat an investment process that provides meaningful alpha will be weeded out. There will be a survival of the fittest mentality. We also believe investors are going to become significantly more conservative in the next 12-24 months (illustrated by money pouring into cash products); however, we do not believe these circumstances will result in the “ice age” of mutual funds.
Mike
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BlackRock, DWS, Legg Mason, JP Morgan, Schwab, JennisonDryden, Hartford, and ING are just a portion of the firms that have announced either the liquidation or the merging away of existing funds in 2009. One of the after affects of the market decline is marginally profitable mutual funds moving into the red as a result of asset depreciation. It is prudent for firms to assess the viability of all of their products by determining:
- Is this fund currently profitable?
- What are the near and long-term prospects of this fund category as it relates to
- My ongoing and potentially shifting distribution effort
If the answer to all three of questions is no or does not fit, firms need to aggressively probe the viability of the product within their fund lineup. The shareholder proxy process is neither simple nor inexpensive; therefore, funds will move deliberately in terms of rationalizing product. However, we believe that post market correction is an ideal time to assess internal capabilities and eliminate any products that don't fit the long-term objectives of the organization.
Mike
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The ICI reported $40 billion in net outflows during the weeks of February 25 and March 4, as a steep decline in the market precipitated dollars being taken off the table once again.
What does this mean? We believe 2009 will be marked with ebbs and flows. Investors do not like the near-term prospects of the equity markets and the stimulus package has failed to stabilize the economy to date or increase investor confidence. Despite a difficult market, we do feel there is opportunity to capture incremental dollars. Consistency of messaging and partnering with distributors to ease concerns of advisors and more to the point their clients is imperative. Sales and marketing cannot hide during a challenging environment. To the contrary, it is now when your distribution partners need the most help in positioning and selling their investment solutions and you should take center stage.
Mike
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The barriers between institutional and retail asset management markets have diminished considerably in recent years, and with this, we have seen firms from both sides of the fence eagerly enjoying the others green grass. Still, these opportunities remain underexploited relative to the opportunity. It should be noted however that as the businesses have converged, the diversifying benefits have weakened as well.
As the fund business outside of the U.S. has grown to rival local industry, asset managers have recognized that international distribution is a powerful growth engine and business diversifier. While the recent market conditions have punished asset levels across borders, relative to European and U.S. markets, flows in Asia have been relatively robust.
All of this takes capital, so while we wouldn't expect the pace of diversifying transactions to equal the desire, we do expect capital to be deployed where it can be found.
Sam
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Guest Blogger Laura Varas of Mast Hill Consulting
First and foremost, the core issue in the marketplace today is trust. Trustworthiness is scarce, and the traditional measures of trust - such as ratings and even long-term relationships - are being thrown into question. Managers who can prove years of reliability, and consistency in shareholder advocacy, are earning the highest flows. Managers should also make sure that their medium-term distribution plan relies on partners who are trusted by the end investor.
While trust is a reward for good past behavior and believable current policies, the second area of competitive advantage actually can be built up going forward. Capabilities to manage income-taking and minimize lifetime taxes, regardless of investment environment, will absolutely distinguish the winners from the pack. This is an area of intense competitive activity right now. No matter where the market heads, retired people tell us they need better support in this managing their withdrawals and keeping their plans on track.
Possibly, a third area may be outcome-oriented investment techniques. In addition to the classic principal protection concepts, firms are exploring hedging techniques that may be able to mimic the benefits of annuities. Economic common sense suggest that pooling mortality risk is hard to beat, though. These approaches, however appealing in concept, face steep cost-benefit trade offs, and skepticism about derivatives-heavy strategies.
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Guest Blogger Magnus Spence, founder of Spence Johnson
What are some of the main differences between the US and European asset management businesses?
I won’t try to track them all here, but here are five that often cause confusion:
- There is no Separately Managed Account business in Europe, or very little. In fact Europeans have no real understanding of this huge US business. What is emerging in the UK and based not on the US but the Australian model are “Wrap” platforms run by insurers, mostly.
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There is very little 401K type business in Europe. In the UK and a little bit elsewhere you get DC business emerging on a similar basis, but this is very rare elsewhere.
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A very important role is played in Europe by many small Private Banks. This type of institution is largely non-existent in the US and causes much confusion.
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Fee-based advisers in the US sense are largely non-existent in Europe. In the few markets where independent advisers do exist (UK and Germany for example) there is a shift happening towards fee-driven advisers, but it is early days.
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There are no wire-houses in Europe as there were until recently in the US. When Europeans (excluding the UK here) look for financial planning advice they tend to visit a retail bank, not a broker.
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Now the game has changed and the new rules of business are steadily, if a bit slowly in my opinion, working their way across the system. Not only will there be a greater disparity among those receiving the market’s rewards…the speed at which firms are “punished” for poor performance has picked up considerably. The combination of natural evolutionary forces with the recent financial crisis are quickly reshaping the industry (e.g. tougher screening of investment products/process, evolution of FAs from broker to advisor, focus on retirement solutions vs. accumulation products) with the changes all ultimately linking back to a net benefit for the end client. Investment firms that have strong cultures, solid leadership and proven investment process obviously have the foundation for success. However, weaker competitors that have been able to “hang around” by making a series of relatively small incremental changes to their business…whether it be in new hires, new products or new marketing programs…are being exposed and will not survive. So…the silver lining in the crisis is to found in the fact that the best run firms that provide real benefit to distributors and their clients will emerge from the current turmoil with a significant competitive advantage over the rest of the pack.
Neil
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As a piece of investment advice, diversification is perhaps the most espoused by asset managers. When applied to firm’s own business portfolios it similarly is thought of as highly desirable, yet strategies in place to achieve this goal very often lack urgency. The latest harsh reminder of the importance of diversification stands to serve as a powerful catalyst in accelerating a number of trends that underscore what asset managers have been doing to diversify their businesses.
Diversifying by asset class and investment strategy: There has been quite a bit of activity on two fronts. First, less bifurcation of traditional and alternative asset management as seen from both the perspective of traditionally focused firms moving in alternatives (i.e. Putnam launching market neutral products) as well as from alternative managers making forays toward the traditional (i.e. firms like AQR Capital entering the more traditional fund space). Secondly there is the more straight forward expansion of firm’s investment capabilities often through a multi-affiliate approach.
Next time we will look at some events and the outlook for firm’s diversifying their distribution focus as well as geographical reach.
Sam
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The asset management industry is not one for change…and I think it is easy to understand why. In the short-term, the marketplace does not precisely allocate its “rewards” to the best run groups. Certainly groups like American Funds and T. Rowe have emerged at the top of the heap -- but there are literally dozens and dozens of investment shops whose core service offering (the investment performance of their funds) cannot be shown to deliver positive value relative to a comparable index/benchmark. Yet, somehow, many these underachieving firms have been able to amass sufficient AUM to enjoy healthy profit margins on top of very attractive compensation levels.
The competitive dynamics of the industry are such that over the last 15-20 years small incremental adjustments to product, pricing and sales support have been sufficient to keep firms “in the game” as long as they had not blown up their investment performance (and even some of these blowups were overlooked). The perceived payback for meaningful restructuring has rarely been sufficient to offset the comfort factor that came from continuing to do things the way they always have been done. It is rare that a firm that is not embroiled in crisis to proactively alter its course in any substantive way.
Neil
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The vast majority of 2008’s memorable events from a financial perspective took place over the last few months. Further, while 2008 will certainly be remembered from a historical perspective, for many the freshness and the pain would be gladly forgotten. So let’s skip the review and instead offer a preview of 2009. From a sales perspective, the good news is that we expect a rebound to positive numbers from the harsh 4th quarter we are leaving behind. Be a bit wary however, as seasonal factors look to be more influential than a real change in short-term sentiment.
Sam
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The asset management industry has stuck to the principle "if it's not broke, why fix it?" However, we believe the industry is poised to undergo a massive shift following the collapse of the market. No longer do firms have guaranteed margins in 20-40% range and difficult staffing decisions are being made every day.
Firms need to study their business practices, measure the ROI of their different functions, and consider overhauling how they do business. In the past, firms were not rewarded for being a first-mover in changing business practices (product development was another matter), as the downside risk outweighed the upside benefits. But now is the time to study every component of your business - investment management, sales, marketing, product, and operations - and embrace change.
Otherwise, margin pressure will continue and your business will be further marginalized.
Mike
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Successfully or unsuccessfully managing a business through a recession largely falls to the astuteness of its management. Are costs being controlled effectively or is cutting being done in an indiscriminant manner? Are opportunities to make deeply discounted acquisitions being taken full advantage of? The answers to these strategic business questions have a profound ability to change the listings of winners and losers during severe market turmoil, but so can tactical actions taking place below the executive management level. A couple of best practices that everyone can employ in today’s environment in order to be best positioned to maintain momentum through the current downturn and accelerate quickly upon recovery include:
1. Keep your eye out for great people who would otherwise not been available.
2. Closely monitor the competition. Turmoil breeds mistakes and innovation, both of which can be capitalized on.
Sam
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