Success of Giant Active Mutual Fund Families Offers Roadmap for Smaller Firms

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Success of Giant Active Mutual Fund Families Offers Roadmap for Smaller Firms


Despite active funds’ net outflows, a few firms have garnered organic growth, offering a unique microcosm to examine the forces shaping the active space


September 2019, BOSTON - The majority of active mutual fund families have faced headwinds in recent years as a broad-based bull market has limited managers’ ability to outperform and both advisors and clients place a higher focus on cost. From 2014 through 2Q 2019, active funds saw nearly $900 billion in net outflows, while passive funds brought in more than $1 trillion over the same time period. Cerulli Associates, a global research and consulting firm, believes that while asset classes may fall in and out of favor, active managers that demonstrate an ability to focus on their core strengths can expect to see sustained growth over the long term.


Despite low-cost investment products waging a war of attrition on active mutual funds’ share of advisor assets, 37% of active mutual fund families with $5 billion or more in assets under management (AUM) had experienced positive organic growth during the preceding five-year period ending 2Q 2019. According to Ed Louis, senior analyst at Cerulli, “Active fund families that have grown organically have shown that there is, in fact, a viable path to success.”


To better understand trends in the space, Cerulli sized the universe of active open-end fund families with $5 billion or more in AUM and segmented each into four AUM tiers:

  • Giant Managers – Firms with $200 billion or greater in active mutual fund AUM
  • Large Managers – Firms with $50 billion to <$200 billion in active mutual fund AUM
  • Mid-Sized Managers – Firms with $20 billion to <$50 billion in active mutual fund AUM
  • Boutique Managers – Firms with $5 billion to <$20 billion in active mutual fund AUM


Examining the key drivers of organic growth for the largest firms can offer a roadmap for smaller firms aspiring to join their ranks. The 12 Giant managers control $6.9 trillion in active mutual fund assets and half grew organically over the past five years.


One of the fundamental ways that successful Giant managers gained marketshare relative to their tier has been by pursuing a brand-forward strategy. Brand-forward firms are those that have solidly entrenched themselves in the minds of advisors and end-investors as indispensable partners. This has been especially important following the financial crisis, which rocked investors’—and consequently advisors’—faith in active management. “Firm reputation is very important to advisors when choosing an asset manager —in fact, nearly half (46%) of advisors build firm reputation into their selection process,” adds Louis. “Successful managers lean heavily on the loyalty they’ve fostered among advisors and rely on it as a core pillar to drive growth.”


Meanwhile, Large fund families averaged a five-year compound annual growth rate (CAGR) of nearly 2%. Like the Giant managers, these firms tend to offer diversified product lines and often have the resources to provide advisors and broker/dealers (B/Ds) with value outside of solely investment management. While nearly 40% of Large managers experienced net inflows, the segment’s growth was largely driven by a few top performers.


Only one-third of Mid-Sized and Boutique managers experienced positive organic growth over the trailing five years. Those able to generate positive flows effectively segmented advisor opportunities in the independent channels and equipped wholesalers with resources to interface with the more sophisticated investment process that top advisor teams employ. Louis adds, “Effectiveness in both these areas is crucial for smaller fund families as top teams control the majority of the assets in this highly fragmented space.”


Cerulli’s newly released report, U.S. Intermediary Distribution 2019: Capitalizing on Specialization, comprehensively covers the distribution of retail asset management products through U.S.-based financial advisors.


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NOTES TO EDITORS:
These findings and more are from The Cerulli Report—U.S. Intermediary Distribution 2019: Capitalizing on Specialization.

 

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