I particularly enjoyed the panel called “What Do Investors Really Want?” where
panelists Dennis Bowden (Associate Director, U.S. Research & Advisory
at Strategic Insight), Kevin McDevitt (Senior Research Analyst at Morningstar),
and Matthew Ramos (Sr. Portfolio Manager at Sullivan, Bruyette, Speros &
Blaney, Inc)discussed what the most relevant
trends are currently in the mutual fund space.
Two major trends surfaced in the conversation:
- The advisor distribution market has shifted in the last 10+ years, moving away from a commission culture to a “fee for advice” structure. This phenomenon has opened up the competitive space and leveled the field for many mutual fund companies. As a consequence, the margin of error on performance has slimmed significantly, but there is also a higher cost of doing business with broker-dealers.
- Increased flows into passive investment vehicles (such as ETFs) have created a huge challenge for actively managed portfolios. As a result, mutual fund companies should focus more on differentiating their products and making their portfolios stand out from their benchmarks. ETFs’ growth, which used to be entirely driven by the institutional market, is now also happening in the retail and RIA spaces, making the competitive landscape for actively managed products even more challenging and the need for differentiation even more obvious.
What makes a mutual fund
attractive?
According to Matthew Ramos, making mutual funds attractive to investors
is all about good and sustainable performance along with having a solid
management team and repeatable investment process. At his own firm, he spends
significant time trying to meet the managers and analyzing other qualitative
factors. Fees also play a role in enticing investors and should be kept under
1% on the active side or 20 basis points on the passive side to meet his
screens.
Kevin McDevitt agreed with Ramos and added that the management team’s
longevity is another important element to consider. He also mentioned
differentiation as a key factor. In Morningstar’s eyes, there are a lot of
similar strategies among actively managed equity portfolios, and those with a
truly unique story have a much greater chance of being noticed. Funds with
strong shareholder/investor orientation are also strongly preferred by
Morningstar’s research team.
According to Dennis Bowden, Strategic Insight’s research shows that in
the last 12 months the most successful funds have been those with the top
performance numbers. He also noted that demand for lower cost share classes has
increased considerably.
At the end of this discussion, McDevitt added that allocation/tactical
funds have recently gained popularity given that investors feel less
comfortable making specific investment decisions in a context of uncertain
macroeconomic factors (e.g.: interest rates). Those funds with higher fees and a
lack of transparency have taken the highest toll.
What’s to be said about
actively managed ETFs?
Bowden pointed out that actively managed ETFs products are going through
an evolutionary state in terms of market adoption. He believes they are less of
an ETF competitor and a more efficiently structured vehicle compared to
actively managed mutual funds. Ramos added that they are interesting products
that he likes and keeps in mind.
My conclusion
In a constantly changing investment scene, actively managed products are
increasingly being challenged by the surge of passive and more efficiently
structured portfolios. In this context, mutual fund companies should make an
extra effort to differentiate themselves and stand out from the crowd. While
performance continues to be a strong factor considered by investors, the
quality and longevity of the management team along with reasonable fees and an
interesting story to tell can come a long way in getting your fund noticed.
What are you doing to differentiate yourself? Telling your unique story
to the right audiences might be a good start to get your fund the attention it
deserves.
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