In a sepia-tinted past, product development for fund houses must have been a reasonably straightforward affair: Offer a flagship ‘plain-vanilla’ equity or bond product and then build a cautious or balanced mixed-asset product around that mainstay.
Not so any more. With investors, advisers and asset allocators becoming increasingly sophisticated, new fund launches in the UK for 2016 were down 55 per cent from the corresponding number in 2006.
Comparably, the market for new launches has also become less segmented. In 2006, new fund launches occurred in more than 50 Lipper global classifications, with 22 per cent of those launches consisting of mixed-asset or targeted return-type products. In 2016, new fund launches covered only 31 Lipper global classifications, but 33 per cent of those consisted of mixed-asset or targeted return vehicles.
Fund houses must put considerable time, effort and resources into building new products. Lead time for a new launch can be considerable – up to a year from conception. Even then, there are no guarantees that, in an increasingly saturated and competitive market, a fund will sell – especially without the often-mandatory three-year track record.
This issue for fund managers must be further complicated by the evolution of the marketplace, driven materially by demographics. This is particularly so in the lucrative and growing mixed-asset space. Consider this evolution: The first readily accessible mixed-asset funds were available via with-profit products, with a shift at the turn of this century towards funds of funds. These, in turn, evolved into more complex multi-asset funds after the great financial crisis. Today, we are seeing the rise of diversified growth funds, diversified absolute return funds, targeted return funds and, increasingly, targeted date or targeted volatility funds.
Crucially, it is demographics that have caused the overspill of institutional asset liability-type funds into the retail space. The provision of income, a key driver for institutional matching, is now considerably more important as ‘baby-boomers’ retire en masse. Not only that, with the three different phases of retirement – high consumption, mid-phase and high income demand – there are even more nuances for advisers to consider.
Today, it is not enough that fund managers offer only a superior bond or equity product. Increasingly, they need to offer ‘solutions’ for advisers rather than merely a vanilla product range. However, advisers who face ever-growing regulatory pressures still have to populate risk and asset-allocation profiles. That is often difficult to do with just a mixed-asset vehicle.
Undoubtedly, the future of fund product development is going to change. Today there are more moving parts to fund distribution than ever, but it appears the most durable trend is income. Although absolute return funds were the fund-flow darling of 2016, collecting £7bn of estimated net inflows, some less-than-stellar returns have challenged that love affair.
It is possible there will be a resurgence of multi-asset income-type funds, and there have been some strong recent additions to this stable that are designed to satisfy retiree demand.
But the reality is the retail fund world is no longer sepia-tinted. Product development experts have their work cut out for them.
