The following is a synopsis of a presentation given at Fund Forum 2015:

Given that asset management is a business of long-term savings, it seems logical to assume that innovation should be of less importance than in many other industries where products decay, fall out of fashion or break. However, analysis by MackayWilliams and Fund Buyer Focus shows that this is not the case – innovation is in fact the lifeblood of the European fund industry. The challenge for individual fund groups is to focus on innovating successfully and avoiding product overload.

Europe’s fund industry currently consists of around 34,000 funds and over 100,000 share classes. The proliferation of product choice has made for an increasingly complex marketplace, to which around 2,000 new funds and 12,000 new share classes are added each year. Fortunately the industry has improved its consolidative efforts somewhat, with fund closures and mergers sufficient to stabilise the net number of funds in recent years but the range of options remains excessive.
This can be frustrating for fund selectors. One of the questions asked as part of the ongoing Fund Buyer Focus survey gauges where selectors would like to see innovation. One in five respond that they are not interested in new innovation and would rather see continued contraction in product numbers. This is well illustrated by a quote from a discretionary manager in Spain: ‘[Fund groups] need to stop producing funds that are too similar to each other because that just confuses investors.’

While proliferation is a problem, it should not stifle innovation, which is crucial to the success of fund groups. The flipside of the statistic given above is that four in five selectors do demand further innovation in fund products. Contrary to initial impressions, asset management is indeed an industry with fleeting fashions and decaying products, and groups need to ensure that their offerings keep up with the evolving needs of buyers. Figure 1 shows the net sales flows for the six months from October 2014 to March 2015 split by the age of the fund. Seventy-five percent of net flows were captured by funds that have been in existence for less than three years. There is some bias towards new funds in that outflows are usually rare but, regardless of this, the evidence is clear: new funds sell.

Fig 1: European fund flows split by age of fund

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Source: Product Innovation Report – July 2015 (MackayWilliams), Net flows October 2014-March 2015. Excludes MM, FF, ETF, Protected, Guaranteed, Target Maturity.

While new funds tend to attract substantial investor attention, old funds generally decline. This is particularly apparent when looking at the sales of funds aged five years or older. Sixty percent of these are now smaller than they were five years ago, despite the recent rapid growth that the industry has enjoyed. This suggests that, just like products in other industries, funds have a lifecycle.

There is a contradiction here. Innovation is critical to survival but proliferation makes the industry ever more complex. Is there a solution to this? Figure 2 shows the European fund universe by number of products, split by fund size. Half of all funds are under €50m in volume. Figure 3 show the total assets accounted for by each of the two groups, highlighting just how little the smaller funds matter to the industry as a whole. Astoundingly, the first half of Europe’s mutual funds account for just 4% of total assets – in other words, a huge proportion of funds meet with little success.

Simplification is the way forward. Closing smaller and older funds that add little to the industry would remove the dead wood, boosting efficiency and freeing up more space for real demand-driven innovation. Unfortunately, this is easier said than done. There is, at present, little impetus to tread this path as regulatory, tax, and commercial drivers limit support for such large-scale fund closures. Still, regardless of the industry’s complexity and inefficiency, all participants should be aware that innovation is needed just as much as elsewhere and, when done right, can prove very beneficial to a group’s sales flows.

Fig 2: European fund numbers split by fund size

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Source: Product Innovation Report – July 2015 (MackayWilliams), data at March 2015. Excludes MM, ETF.

Fig 3: European fund assets split by fund size

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Source: Product Innovation Report – July 2015 (MackayWilliams), data at March 2015. Excludes MM, ETF.

Chris Chancellor

Consultant, Fund Buyer Focus and Mackay Williams

Chris is a strategic thinker with a background in the asset management industry. He has worked within asset management since 2000 with roles in marketing, product strategy and development, management information and business strategy and planning. He has a strong understanding of industry trends and also the commercial drivers and business dynamics within asset management firms.

During his time at a global asset manager he created and ran an EMEA business and product strategy team reporting to the Head of EMEA to monitor trends both within and outside the business and create solutions to business challenges and opportunities. Chris has both the IMC and CFA qualifications.

MackayWilliams LLP is a London-based mutual fund market analysis and research company specialising in all aspects of the domestic, pan-European and cross-border fund markets. Its subsidiary, Fund Buyer Focus, offers reporting and consulting services which provide third-party retail fund suppliers with detailed information about how the major fund distributors perceive them and how this perception translates into business.

Website: www.mackaywilliams.com


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