Change continues to unfold at a rapid pace within the U.S. fund market, carrying wide-ranging implications for firms’ product, distribution and overall organizational strategies. The secular nature of today’s challenges necessitates thoughtful and honest reflection by fund managers – with the decisions and actions of today carrying important consequences around many firms’ future success. Below are three key strategic considerations for fund managers in 2018 and beyond.
1. Changing role of active management within adviser portfolio construction
The shift to a fee-for-advice market, expanding availability of passive strategies, regulatory influence and more continue to change the characteristics of adviser portfolio building. Such change includes the role of active funds and the criteria by which such strategies are evaluated (particularly among U.S. equity offerings). Demand continues to concentrate among elite-performing active U.S. equity funds, a trend which should continue regardless of stock market behavior in 2018.
If the way that advisers utilize active funds within portfolio construction is fundamentally changing, fund managers must consider how their existing products and potential new funds fit and add value within new portfolio-building value chains. Part of this exercise may be long-term efforts to further diversify product lineups beyond heavy reliance on U.S. equity. In the more immediate term, however, what changes can be made to more closely align firms’ product offerings with advisers’ shifting preferences? In particular, might the characteristics (risk profile, fees, etc.) of certain traditional equity strategies – especially those which may be stuck within the increasingly commoditized “middle ground” of active exposure – be modified to play a more distinct role alongside passive within advisers’ evolving portfolios?
Shifting portfolio construction characteristics carry important implications around adviser demand and active fund evaluation.
2. Increasing concentration of demand across product lineups
Shifting portfolio construction and fund selection attributes, combined with platform rationalization efforts at key distributors, suggest that many firms may find flows increasingly concentrated among a limited number of “in demand” funds. Such imbalances carry important implications around potential product line rationalization pressures. They also may create significant misalignment between the scope of sellable funds and the expansive (often resource intensive) sales and distribution efforts of many intermediary-sold fund managers.
With competition rising and margins increasingly pressured, this issue speaks to broader organizational strategy questions for many firms. For those who identify their sales and distribution capabilities as a core organizational strength, how can such operations be leveraged more broadly? Could, for example, the utilization of subadvisers within certain asset classes be a viable path (commercially and culturally) to supplement existing product offerings and expand the reach of distribution efforts? Beyond individual fund offerings, are there additional capabilities of the firm which can be brought to bear on clients (asset allocation, risk or tax management, etc.) through the distribution organization?
On the other side of the coin, for firms who identify focused investment expertise as their core organizational differentiator, how might the scope and focus of sales efforts need to be adjusted in the face of today’s pressures?
3. Shifting distributor business models
Evolving platform structures (traditional and digital), shifting centers-of-influence, changing financial demands across distributors and more will carry wide-ranging implications for fund managers. At a high level, such changes may result in increasingly diverse opportunity and cost characteristics across different distribution partners moving forward. Such diversity, combined with the margin pressures referenced earlier, reinforces the importance for fund managers of effectively focusing resources on the most profitable opportunities.
One area likely to see a particular increase in variability is the financial relationship between fund managers and distributors. Evolving share class demands (including expanding use of zero/zero classes within retail platforms), shifting approaches to revenue sharing, and other factors are poised to disrupt the existing financial ecosystem within the intermediary-sold marketplace. For fund managers, such potential change reinforces the need for a profitability-centered evaluation of distribution partners – including comparisons of metrics such as costs of acquisition, retained revenues, and more (SI’s recently published Analysis of External Fund Distribution Costs study includes detailed analysis of payments to third-party distributors and related profitability measures across channels).Back to Research Blog