As Product Proliferation Intensifies, Managers Should Assess Demand and Capabilities


As Product Proliferation Intensifies, Managers Should Assess Demand and Capabilities


Building out new investment vehicle offerings has been a recent priority for asset managers as the mutual fund slips from dominance

October 2019, BOSTON - In a 2019 survey issued by Cerulli Associates, a global research and consulting firm, asset managers indicate that their product plans for the next 12 months are spread across mutual funds (27%), exchange-traded funds, or ETFs (25%), and separate accounts (29%), but they also include other vehicles (18%), such as collective investment trusts (CITs), private commingled funds, and interval funds. As asset managers seek to deliver a more vehicle-agnostic approach to product development, they must consider a number of factors in developing their roadmap to success.

Increasing cost-awareness and a more stringent focus on fiduciary responsibility is causing mutual fund providers to prioritize development and distribution of other vehicles over the mutual fund. “As this trend develops, the goal should be to provide clients with the ability to consume a strategy in the wrapper of their own choosing, but this may not always be the best approach due to structural barriers and overall feasibility,” according to Brendan Powers, associate director at Cerulli. “Instead, as asset managers continue to expand their vehicle offerings, they need to do so in a thoughtful and practical fashion, considering a number of factors, including the strategy they are seeking to distribute, their primary client target markets in which it will be distributed, and any changing demand from the client segments within those markets.”

Frequently, one of the main decision points Cerulli notes is whether to clone an existing strategy for a new vehicle or to differentiate into a new investment strategy when building out a new vehicle. However, the cloning and differentiation debate may not be the best way to think about this product development dynamic. Powers suggests, “Firms should be focused on evaluating what investment strategy makes sense—both from a capabilities and a demand perspective—and then finding a vehicle or vehicles for which it makes sense. If more than one vehicle makes sense, then firms can consider cloning the strategy, assuming there is going to be demand for both vehicles and it does not result in any conflict of interest for key clients.”

While vehicle-agnostic delivery of investment capabilities is likely the long-term direction of the asset management industry from Cerulli’s perspective, there are still significant operational issues that could hinder more substantial vehicle proliferation. “One of the most glaring is the sourcing, use, and harvesting back of seed capital,” says Matt Merritt, product development analyst at Cerulli. “Amidst high-level trends such as product rationalization, fee compression, and the increased use of passive product, asset manager budgets are being compressed, leading to the lifecycle of seed capital being viewed with more scrutiny than in years past.”

Cerulli emphasizes the importance of a clear long-term strategy prior to seeding new funds (i.e., developing specific asset class capabilities vs. trying to develop vehicle-specific capabilities) and careful planning of seed capital sequencing prior to incubating a new strategy. This will help to ensure that the expectations regarding seed capital are properly aligned between senior management, portfolio management, and the marketing and distribution teams.

Cerulli’s latest report, U.S. Product Development 2019: A Roadmap to Vehicle Proliferation, focuses on how asset managers are expanding their investment vehicle offerings beyond the mutual fund and into ETFs, CITs, separate accounts, and alternative product structures. Additionally, this report focuses on the use of seed capital and how it is being sourced and recaptured.


These findings and more are from The Cerulli Report—U.S. Product Development 2019: A Roadmap to Vehicle Proliferation.


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