In a sepia-tinted past, product development for fund houses must have been a reasonably straightforward affair: offer a flagship “plain-vanilla” equity or bond product and build a cautious or balanced mixed-asset product around that mainstay.
New Launches Down but Mixed Funds Up
Despite investors, advisors, and asset allocators becoming increasingly sophisticated, new fund launches in the U.K. for 2016 were down 55% from the corresponding number for 2006. Comparably, the market for new launches was less segmented: In 2006 new fund launches occurred in more than 50 Lipper Global Classifications, with 22% of those launches consisting of mixed-asset or target return-type products. In 2016 new fund launches covered only 31 Lipper Global Classifications, but 33% of those launches consisted of mixed-asset or targeted return vehicles.
Exhibit 1. Composition of New Fund Launches (Registered for Sale in UK) in 2016 – by Lipper Classification
Source: Thomson Reuters Lipper, Lipper for Investment Management
Fund houses must put considerable time, effort, and resources into building new products. Lead time for a new launch can be considerable–up to a year from conception. Even then, there are no guarantees that in an increasingly saturated and competitive market a fund will sell–especially without the often-prerequisite three-year track record.
Demographics driving design
This issue for fund managers must be further complicated by the evolution of the marketplace, driven materially by demographics–particularly in the lucrative and growing mixed-asset space. Consider this evolution: The first readily accessible mixed-asset funds were available via with-profit products, with a shift at the turn of this century toward funds of funds. These in turn evolved into more complex multi-asset funds after the great financial crisis. Today we are seeing the rise of diversified growth funds, diversified absolute funds, targeted return funds, and increasingly, target date or targeted volatility funds.
Crucially, it is demographics that have caused the over spill of institutional asset-liability type funds into the retail space. The provision of income, a key driver for institutional matching, is now considerably more important as “baby-boomers” retire en masse. Not only that, with the three different phases of retirement (high consumption, mid-phase, and high income demand), there are even more nuances for advisers to consider.
“Solutions” and income are key
It is not enough today that fund managers offer only a superior bond or equity product. Increasingly, they need to offer “solutions” for advisors rather than merely a vanilla product range. However, advisors who face ever-growing regulatory pressures still have to populate risk and asset-allocation profiles–often difficult with just a mixed-asset vehicle. The concept of outcomes based investment is the round hole with current product ranges a square peg into which it needs to fit.
Undoubtedly, the future of fund product development is going to change further. Today there are more moving parts to fund distribution than ever, but it appears the most durable trend is income. Although absolute return funds were the fund-flows darling of 2016, collecting some £7 billion of estimated net inflows, some less-than-stellar returns have challenged that love affair.
It is possible there will be a resurgence of multi-asset income-type funds, and there have been some strong recent additions to this stable that are designed to satisfy retiree demand.
The reality is the retail fund world is no longer a sepia-tinted one. Product development experts have their work cut out for them.