The Financial & Risk business of Thomson Reuters is now Refinitiv

All names and marks owned by Thomson Reuters, including "Thomson", "Reuters" and the Kinesis logo are used under license from Thomson Reuters and its affiliated companies.

June 11, 2018

Monday Morning Memo: How to be successful at fund distribution

by Detlef Glow.

When a fund selector or investor searches for a fund to fit the needs of a given portfolio, he or she will analyze a specific fund universe with risk and performance measures to see which funds are suitable. Immediately after this analysis (in some cases even before) the analyst will investigate the assets under management (AUM) to see if a particular fund is large enough to absorb the planned investment amount. In a number of cases it will turn out that even funds with superior performance are quite small in AUM (i.e., the AUM may be below 50 million euros), which might constrain the investor from making an investment, assuming the fund will not be able to digest the investment. In some cases investors are also tied to guidelines that do not allow them to invest above a given percentage of the AUM of a single fund. This leads fund promoters to a hen-or-egg problem, since in general they would like to manage larger funds. But, large investors might not buy small funds, even when these funds have a superior track record.

This hen-and-egg problem becomes even bigger in the ETF segment; many investors who use ETFs for their portfolio construction are professional investors who may not want to invest in a small ETF. These funds often show low liquidity on screen, and on-screen liquidity is often misinterpreted as a lack of liquidity in general.

With regard to this, a fund manager has to ensure that the fund grows quickly over the critical mass, so the product will be interesting to investors from a performance and size point of view.

But even though these two tick boxes might be checked, fund promoters have no guarantee that their product will be of interest to fund selectors and investors. Investors also appreciate the service around a fund, first of all that it is available on the platforms used by the investors and, secondly, that the general information (such as sales documents, etc. and personal contact information for the portfolio manager or at least the portfolio management team) are available. Professional investors especially want to have fast access to a fund management team if the performance of the fund isn’t following the expected path or in times of market turmoil. In addition, fund selectors/investors need to have quick access to a client service team to clarify any issues that may appear.

It can be concluded that while superior performance and of course a predominant investment process in combination with an adequate AUM will open the door to a fund selector/investor, it does not mean the investor will buy the fund. The ultimate decision of whether to buy a fund is also related to the level of service and support offered by the fund management company. Fund promoters need to install sufficient client service and a sales team to attract investors. Since many service requests, especially with regard to general information about the fund and the management process, can be provided on the Internet, fund promoters should build a state-of-the art webpage to minimize incoming information requests and to maximize availability of the information, especially after general business hours. Fund selection has become a 24/7 business. In that regard active managers could learn a lot about how fund information and product education can be done online by looking at the webpages of ETF promoters.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

 

Get In Touch

Subscribe