Jan 06 2013
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US mutual funds to 'reenergize' growth in the midst of challenges
They will need to consider judiciously launching new funds -- including exchange-traded funds (ETFs) -- with an eye toward meeting specific investor needs and taking advantage of their portfolio managers' strengths, the report said.
Moreover, fund firms will need to be thoughtful and creative in their distribution strategies by cultivating relationships with the Registered Investment Advisor (RIA).
Even with the prospect of increased regulatory scrutiny for the mutual fund industry, there are opportunities for strategic growth in 2013 and beyond.
With investors purposefully pulling assets from stock mutual funds in 2012 in search of more predictable returns, the industry's outlook may hinge on how successful fund managers are in expanding into ETFs, sharpening their fund selection criteria, and penetrating the RIA distribution channel.
For 2013, Deloitte expects that fund firms will continue to enter the ETF market as a growth play in 2013. After all, investors are drawn to ETFs for their low costs, tax efficiencies, and exposures to different asset classes. Even though there are more than 1,400 US exchange traded products today, there is still a backlog of ETF registrations awaiting approval by the SEC.
The SEC staff's decision to process exemptions for actively managed ETFs that use derivatives will alleviate some of this backlog and open the door to even greater ETF market penetration.
One thing firms should keep in mind when expanding into the ETF space is the downward pressure larger firms will likely continue to exert on profit margins.
In 2012, the industry saw several ETFs shut down due to fee pressures and declining investor interest in the investment offering.
For many, survival in the ETF space will depend on scale as firms with more AuM will have an easier time offsetting fee reductions.
However, a fund with a niche offering, favorable name recognition, or a good track record can overcome size and margin constraints. Fund firms may choose to transfer their expertise in one investment area into ETF form or convert an existing mutual fund to this structure. No matter the method, smaller mutual fund groups need to determine if they can be competitive in a lower-fee environment. Looking beyond ETFs, Deloitte expects fund companies to gauge investor appetite more closely before proceeding with any new fund launches. Most companies no longer have the luxury of launching multiple funds in hopes that they will be successful.
Given the costs of starting new funds, those initiated in the coming months will need to have a sharper focus to lure investors looking to act in the near term. Should the macroeconomic situation mirror 2012, Deloitte expects to see the introduction of more balanced and fixed income funds.
These help fulfill investors' demands for reduced risks and alleviate concerns around the equity markets. Additionally, as investors seek alpha and downside protection on parallel tracks, fund firms offering alternative, hedge fund-like strategies are likely to attract inflows. By some estimates, these funds are expected to double their assets between 2011-2016.5 Mutual fund groups will also need to hone their distribution strategies in 2013.
Historically, fund firms have focused on high-volume brokerage networks for reaching investors, but RIAs offer another tempting avenue for growth. RIAs were not as challenged during the economic downturn as other distribution channels, and their future appears bright. The SEC expects RIAs with more than $100 million in clients assets will likely double client assets between 2011 and 2021. Fund firms need to ensure they have adequate resources dedicated to building and maintaining relationships with these ever more influential gatekeepers.
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