Successful fund launches since the turn of the century may have been “a function of luck, not skill”, according to a damning report into asset managers’ product development.
Half of all investment strategies launched since 2000 failed to raise $200 million, “even after 10 years of distribution”, according to the report from consultancy Casey Quirk. Only a quarter of launches hit $1 billion, and only one in 10 had reached this milestone within three years of launching.
“For many asset management firms, the product development processes that arguably aim to encourage innovation actually stifle it.” —Casey QuirkCasey Quirk—which provides specialist advice to asset management companies—predicted that the majority of existing “traditional” investment products would see trillions of dollars withdrawn by retail and institutional clients in the next five years. Equity funds were expected to see more the $2 trillion withdrawn by 2020.
But “weak product development processes” are restricting managers from moving away from benchmark-oriented funds towards multi-asset or quantitative products, the consultancy claimed.
The report—“New Arrows for the Quiver: Product Development for a New Active and Beta World”—said most senior executives at large groups recognize the importance of product development “but also rate themselves highly at developing new products”.
“A broader
industry perspective, however, reveals that creating ‘big winners’ might be a function
of luck, not skill,” the report said. “The ‘blockbuster’ investment strategies
that asset management executives crave are few and far between.”
Casey Quirk highlighted several shortcomings by asset managers when developing new strategies. These included overestimating demand, charging fees “out of line with market expectations”, or building strategies that are too complex for distributors to explain.
“Asset management firms that agree to question all beliefs, and design product arrays without pre-existing conditions, tend to fare better.”In addition, the report claimed that many promising ideas “never see the light of day” as they are “mired in governance processes that become overly bureaucratic or wedded to ‘sacred cows’—in this case, increasingly less relevant views on active asset management (many related to benchmark-oriented investing) that investment professionals are reluctant to discard.”
“For many asset management firms, the product development processes that arguably aim to encourage innovation actually stifle it,” the report said. “Weaker processes also often result in delayed product launches and products designed by consensus.”
To solve these issues, Casey Quirk urged asset management executives to set out clear strategies for their businesses. The report cited the importance of discipline, governance, creativity, collaboration, and rejecting “sacred cows”.
“Most well-intentioned asset managers agree to develop products within existing investment theses and beliefs without questioning their future relevance,” Casey Quirk’s report said. “This leads to product proliferation: development groups add products to innovate, but simultaneously maintain legacy products, often at the behest of portfolio managers.”
“Asset management firms that agree to question all beliefs, and design product arrays without pre-existing conditions, tend to fare better,” the consultancy said.
Related: Where Do Asset Managers Make the Least Money? & The Startup