Last year proved to be another sluggish 12 months on the product development front with new launches failing to keep pace with the numbers of closures and mergers.
Cleaning out the unproductive funds is inevitably a slow process and, for various regulatory and tax reasons, it is unlikely to result in any dramatic culls in the near future. The rate of product growth, however, has been halted and the longer-term trend will be one of gradual shrinkage.
Although 2012 was a good year for asset management, pressure on profitability will inevitably increase as the raft of planned EU regulations take effect. Not least of these is the move towards a Europe-wide commission ban, which has already begun to focus fund selectors’ attention on low-cost trackers.
Regulation and resulting cost pressures may inhibit product development but the commission ban alone could be a driver of new launches as groups revamp their offerings to deliver product ranges that are differentiated by price.
For most asset managers, however, expansion is far more likely to be at the share class level and this is where proliferation continues to be a feature of the European landscape. According to Lipper data, in the past five years, the number of share classes available in Europe has risen by 67 per cent, compared with just 1 per cent growth in the overall number of funds available.
Demand for different pricing structures, currencies, client requirements and hedging options has led to an exponential expansion in share class complexity that is likely to continue, despite the extra cost levied by KIID requirements. There are now more than 130,000 share classes available and the number has been growing at a rate of 10 per cent or more a year.
Fund closures and mergers may be sufficient to halt the steady pace of product proliferation but there will still be upwards of 2,000 launches in 2013 because every group has its product development team and they have to earn their keep by anticipating future investor appetite. This is no mean feat because the importance of track record means that, without access to a captive client base, they must position their products for a world that is probably at least one and more likely three years away. Consequently, the asset management industry consistently launches an average of 200 or more funds a month come rain or shine.
What then are the likely themes of this year’s new crop, bearing in mind that the bulk will be me-too funds looking to share successful themes of the recent past that are expected to last?
Funds in the absolute return space must be a top pick for the year. The demand for outcome oriented products and funds that are not constrained by benchmarks will continue to be popular and will expand beyond the obvious asset allocation sector, moving into more exotic areas such as emerging markets and perhaps into some of the thematic sectors.
We have already seen some emerging market pioneers and in time we could find the industry defined not only by active/passive but also by constrained/ unconstrained strategies that apply across all or most asset classes and sectors. A second obvious area of development in a world where the craving for yield has overtaken demand for capital growth is in equity income funds. This is a sector that has been a traditional staple of the UK industry, and has seen more recent success in Germany and wider Europe as investors begin to reconsider adding equities in their portfolios. But just as “high yield” has become such a popular part of bond investing, so we can expect to see dividend strategies extend to “high dividend”. Exotica is also likely to feature in this move with emerging market products offering enhanced income features and also the possibility of some funds offering a predetermined income commitment.
The equity arena is where product developers tend to be most active. The opportunities for variation and creativity are boundless so third on my list of product development themes are the ubiquitous global equity funds. This sector is the most prolific in terms of numbers of products but in a crowded space differentiation is becoming difficult. With price pressure building on the standard indexed fare engineers are forced to develop ever more specialist global equity themes. Thus, funds that offer new angles on limiting volatility or boosting returns through original styles of stock selection will continue to be an important feature of launch programmes.
These are just three big themes; along the way we will see more emerging market products that will become more niche in their bid to differentiate, and specialist funds that try to capture a novel investment opportunity. The chances of seeing a new idea that becomes a blockbuster in its first year are slight but fund launches are the lifeblood of the industry. Without this continual generation of new ideas, the old-fashioned balanced category would not have been invigorated by the new-style flexible investments that are in demand.
Diana Mackay, CEO of MackayWilliams and publisher of Fund-Radar