While the growth of passive ETFs has forced active fund managers to work harder for business, they are still expecting to reach 9% annualized growth over the next five years, according to Ernst & Young’s 2014 Global Regulated Funds Survey.
“Many managers also see ‘solutions-based’ products (absolute return strategies, lifestyle products and guaranteed capital products), with a clear focus on client expectations and desired outcomes, as additional sources of growth,” says the survey.
Active fund managers are exploring new strategies instead of new product categories
Even though we’ve heard a lot about smart beta funds and other low cost products, the introduction of new product types was only the third most popular approach to attracting more capital in developed markets. Managed funds were much more likely to experiment with new strategies and strategy classes or simply push some of their more successful existing products, though the ranking flips in Asia and Latin America. The survey also found that new product development takes longer in the US than it does in other regions (6 – 12 months instead of 3 – 12).
Still, it seems clear that managed funds are just trying to outperform passive ETFs, they are positioning themselves to offer services that aren’t easily replicated. Asked to name the most important considerations when launching a new product, investor demand and ability to grow AUM came ahead of profitability everywhere except for Europe, and even there profitability was only tied for second place. Risk profile was an almost an afterthought. While it was tough for every fund that sat out the 2013 bull market, those that turned into closet indexers do seem more vulnerable to comparisons with ETF than low-beta funds with a strong track record of providing absolute returns.
Active fund managers worry about future regulations
Asked about the future of the industry, 79% said that the changing regulatory environment would be the biggest driver of change, followed by changing investor demographics and changing demand. That would be troubling, but it seems to directly contradict what managers said about product development and idea generation. Maybe there’s a coming regulatory sea change, but it seems more likely that the gap between the actual and expected impact of regulation tells us how managers feel about red tape (they hate it, a lot, and worry there might be more in the future).