Outlook Upbeat for Sub-Advised Funds: Global Demand to Fuel Need for Fund Specialists
January 28, 2008
NEW YORK-The marketplace for sub-advised and multi-managed funds is projected to continue growing as financial products become more complicated and fund shops look to outsource specialized work.
"More firms are turning to sub-advisors to leverage external skills," said Lynette DeWitt, vice president of sub-advisory research for Financial Research Corp. "We will likely see a narrower product focus as competition increases."
Sub-advised products comprised approximately $1.6 trillion as of year-end 2007, including $1.1 trillion in mutual funds, or 69%, and $513 billion in variable annuities, or 31%, DeWitt said last Wednesday at Financial Research Associates' Sub-Advised & Multi-Managed Funds Summit.
"FRC projects more of the same for 2008," DeWitt said. Sub-advised mutual funds should continue to see strong asset growth of near 10% annually over the next five years, she said.
Sub-advised and multi-managed products are valuable to fund companies because they handle day-to-day management of the fund and can fill in areas that lack internal investment expertise without requiring the fund complex to build new products or keep the managers in-house.
A sub-advisor can manage multiple funds simultaneously or in groups with multiple managers. Fund boards take their fiduciary responsibilities seriously and are often quick to change sub-advisors who perform below expectations, DeWitt noted.
In 2007, product development saw mostly copies of the tried and true, such as large-, mid- and small-cap growth funds, value funds and bond portfolios, DeWitt said, but there were also several new products, including 130/30 funds, lifecycle funds, global funds, principal-protection, market-neutral and infrastructure funds.
The number of sub-advised funds is expected to increase, with Pioneer Investments, Nationwide and John Hancock continuing to stay in the lead, DeWitt said.
Multi-managed funds are also expected to increase in numbers, with leaders SEI, Vantage Point, Principal and MassMutual continuing to stay on top, she said.
International sub-advisory firms will gain more market share in 2008, DeWitt continued, and lower fees from international mandates could further undercut domestic shares subject to heavier regulatory demands.
"A recession could cause a slowdown in product development," DeWitt said, and "long-only fund companies will accelerate their use of sub-advisory strategies."
Industry consolidation and internalized fund management in the U.S. could pose challenges to growth, she said, but the sub-advised marketplace is becoming multi-national.
"We see growth ahead, and that's great news," DeWitt said. "U.S.-based asset managers can get in on the ground floor in Europe and Asia and can see high levels of returns."
Smaller asset managers have more opportunities for growth, and there is a clear opportunity for boutique players such as Analytic Investors, the FRC VP said.
Other topics discussed at the summit included ways to leverage sub-advisory opportunities outside the U.S. by identifying opportunities in the market, attracting international investors, identifying key drivers for sub-advisors in emerging markets and understanding the growth opportunities in Europe.
Attendees learned the pitfalls and other competitive landmines they should consider and how to determine best practices for operating in an international business environment by inspecting the political, compliance and regulatory climates.
In addition to specialized topics, attendees also learned some of the basics, including how to build a sub-advised business from the ground up and how to maintain profitable sub-advisory relationships.
A lack of communication and marketing support can pose huge hurdles to sub-advised firms, particularly small shops that haven't yet built a strong brand.
Competitive positioning and improving brand identity through product design, messaging and co-branding can help businesses to improve commercial success.
When creating and structuring multi-manager funds, traditional considerations for multi-manager, sub-advised strategies include marketing and sales efficiency, operational implications and investment justifications. Planners should try to understand key topics like the repeatability of performance, implications for retirement and other long-term investors, investment expectations and the impact of distribution gatekeepers.
A multi-manager fund also presents unique challenges for attracting and retaining investors, and conference attendees learned how to draw on successful experiences to provide ongoing satisfaction to retain and grow assets, allay concerns to minimize investor loss and various ways to create interest in order to attract new investors.
Douglas Peebles, executive vice president, chief investment officer and co-head of fixed-income for AllianceBernstein, said managers need to think differently to get more from the securities markets.
"You need to broaden your traditional approach," Peebles said. "Equities are definitely globalizing."
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