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Q: What technologies are having the greatest impact on sales and distribution?
A: Given the magnitude that technology continues to play within the financial services industry, FUSE fielded a survey earlier this year to specifically determine the technological impact on the sales process of investment products. Survey respondents rated how certain technologies will impact sales and distribution over the next three years. On average, survey respondents stated that tablets would have the most impact on sales over the next few years. In fact, nearly 30% said they will change the face of sales forever. More than half (57%) of survey respondents provide tablets to sales/distribution personnel. Also, larger firms have adopted the use of tablets at a faster pace than smaller firms, in addition to firms with a retail focus compared to firms with an institutional focus. Cloud computing was ranked second for having the greatest impact on sales and distribution over the next three years. Cloud computing has become an emerging theme that is gaining investor attention. Forrester Research projected total public cloud revenues to rise 27% annually to nearly $160 billion in 2020, up from $15 billion in 2010. IDC also predicted that while global IT spending increased by 6% in 2011, spending on public cloud computing services will grow five times faster.



Q: Will the ETF industry maintain its momentum moving forward?
A: We do see ample opportunities for the industry to expand; however, the pace at which ETFs are bringing in new assets is no longer growing at the clip that we’ve seen in past years. In fact, AllianceBernstein recently forecasted that the $1.1 trillion U.S. ETF market will grow by a compounded annual rate of 13%, hitting $6 trillion by 2025, far below expectations of a $10 trillion industry by 2025. In terms of actively managed ETFs, the industry hit a recent roadblock with the SEC’s rejection of Huntington’s request to convert an open-end fund to an ETF. Had Huntington received the green light, we expected other firms to follow its lead. As noted in Barron’s, Citigroup reported that it is getting more difficult for new fund companies to stand out. The ETF industry remains highly concentrated—the top 10 ETF providers account for 95% of AUM. Also, the article highlights that new products account for 2% of industry ETF growth so far this year, down from 6.4% last year. 


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FUSE Blog


Don't Miss This (1/26/16)

1) OppenheimerFunds Enters Smart Beta Space
    OppenheimerFunds | 1/22/2016

Because… Unlike some other traditional asset managers that have built their ETF capability from scratch, OppenheimerFunds’ acquisition of VTL Associates’ RevenueShares ETFs gives the firm an immediate access to a group of ETFs with long-term track records. Since six of eight ETFs were launched in 2008 and 2009 (with another one hitting the 3-year mark by the end of September this year), the firm is able to provide historical data, such as trading volume, daily volatility, portfolio characteristics, risk statistics, and five-year returns, for investors to perform their own competitive analysis. The availability is extremely important in the smart beta ETF space where many products have not been in the marketplace long enough to show their mettle.

2) Smart beta continues to confound advisers
    Investment News | 1/25/2016

Because… The advisors’ confusion is legitimate. There has been no empirical evidence that rules-based smart beta strategies have consistently outperformed traditional market-cap indexed strategies under different market conditions, so investors may question whether different weighting schemes can add true value to their portfolio. In addition, the proliferation of smart beta products can easily overwhelm advisors, making it hard for them to determine which one to gain exposure to. Therefore, fund firms should ensure investors have a thorough understanding of benefits and risks of their particular strategy, circumstances in which the strategy works well, and certain applications from an investor’s perspective.

3) Vanguard CEO Urges Industry to Slow Down on ETF Rollouts
    ThinkAdvisor | 1/25/2016

Because… While we encourage innovation, we second the Vanguard CEO’s suggestion to slow the pace of ETF introductions. We believe there is room for more products, but on the other hand, we have seen funds liquidated even before their one-year anniversary. As broad market-based ETFs are already offered by major players, ETF sponsors are increasingly looking to cover finer slices of capital markets. However, some niche strategies are vulnerable as they are unlikely to catch on with investors. ETF providers should work with their distribution partners to generate practical ideas, validate the concepts, and define the market positioning before the fund launch so that new products can better meet investors’ specific needs.


Don't Miss This (1/12/16)

1) SEC Announces 2016 Examination Priorities
    SEC | 1/11/2016

Because… The SEC’s planned scrutiny of ETFs and variable annuities will push product providers to move compliance into the forefront of risk management. Since any compliance failure could damage brand value, compliance officers need to ensure their compliance programs strictly adhere to regulatory requirements. Trading practices, sales recommendations, and information disclosure are among this year’s key areas of focus. Strong internal controls should be established and enforced to avoid potential legal entanglements. The management team and board of directors at these firms should also play a more proactive role in overseeing the compliance function as it is part of their oversight responsibilities and they are held accountable for any breach of fiduciary duties.

2) Morgan Stanley Names Operating Chief as Lead of 'Digital Offering'
    Investment News | 1/11/2016

Because… Morgan Stanley is another wirehouse after Merrill Lynch to develop a robo advice platform. The digital offering could attract more young investors to the firm, and the chance of turning to a full service advisor is increased when their portfolio assets grow over time. While Schwab’s success of amassing $5.3 billion in its first year indicates the demand is very strong, whether the Morgan Stanley platform can also be a hit will depend on its asset allocation algorithm, pricing structure, account minimum requirement, underlying investment options, account management capability, ease of use, and availability of live support.

3) Amidst the Market Carnage, Liquid Alt Funds Lived Up to Their Promise
    Investment News | 1/11/2016

Because… Unfavorable market conditions in 2015 and early this year are a perfect time to test the validity of alternative investments. If they can hold water as anticipated, they will be able to attract more investors. According to FUSE’s estimates, alternative strategies mutual funds had $211.8 billion in assets as of November 2015, down 0.1% from a year ago. These funds collected $6.1 billion in the first 11 months of 2015 after garnering $26.7 billion throughout 2014. The much slower pace of raising new assets suggests that investors are questioning their ability to weather the market storm.


Total estimated outflows from long-term mutual funds were $12.40 billion for the eight-day period ended Wednesday, December 30, according to the Investment Company Institute (ICI). The year ended with all broad asset classes in negative territory with the exception of Municipal Bond, which experienced its 13th consecutive week in the black. Its $2.2 billion in net inflows represented its largest intake in more than six years. Meanwhile, investors yanked $6.8 billion from Taxable Bond, which once again, led redemptions. World and Domestic Equity suffered $3.1 billion and $2.9 billion in outflows, respectively. For the 11th straight week, Hybrid fund remained in the red, with nearly $1.8 billion in redemptions.

Source: Investment Company Institute



Prior to the Federal Reserve’s interest rate hike in mid-December many firms had already converted their prime money market funds into government money market funds. Since the hike, not only has the number of firms that have decided to convert prime funds into government funds steadily increased but so has the spread between the yields. Although early in the cycle, we think this increase highlights the elevated pressure on money market funds as investors will continue to look to bank products that provide higher yields.

Source: Morningstar, Inc. and Crane Data LLC


Don't Miss This (1/5/16)

1) Global ETF Industry Grabs Record Cash in 2015: BlackRock
    Reuters | 1/3/2016

Because… The record high inflows of global ETFs manifest once again the popularity of this investment vehicle, which will draw attention of asset managers that have not stepped into the world of ETFs. In the U.S., although flows into ETFs did not surpass the record set in 2014, the sales of $228 billion were still remarkable. As of end November, YTD sales of ETFs were nearly six times of those of mutual funds. Meanwhile, the concentration in top ETF providers (i.e., iShares and Vanguard) and products with a particular investment theme (e.g., WisdomTree Europe Hedged Equity and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF) indicates newcomers are facing daunting challenges in playing catch-up.

2) Year-end Investor Sentiment Flattens, Matching a Two-Year Low, According to John Hancock Survey
    PR Newswire | 1/4/2016

Because… With the DJIA posting the worst start of the year in eight years and the S&P 500 ending the first trading day with the biggest loss since 2001, the investor sentiment could stay low for a long while. The market outlook reports from Wall Street firms we have reviewed so far did not paint a rosy picture for the year either. Asset managers should therefore appease investor apprehension proactively by sharing approaches to navigate market volatility, stressing the need for staying the course without being affected by headline news, and offering investment solutions that can minimize risks and cope with the market precariousness.

3) Mutual Funds Run by Stockpickers Fall Short in 2015, Extend Losing Streak
    Reuters | 1/4/2016

Because… Active asset managers may be discouraged by the data that shows only 46% of the 3,232 actively managed equity funds tracked by Lipper outperformed their relative benchmark. Fund firms have been attempting to beat the market by making contrarian bets, placing a cap on the fund size to prevent the asset bloat, or trimming portfolio holdings to focus only on the best-of-the-best ideas. However, asset managers should keep in mind that no matter what creative strategies they have developed, distinguishing themselves for the sake of standing out should not be the goal. Demonstrating the viability of their strategies with solid track records can eventually win over investors.


Don't Miss This (12/22/15)

1) SSgA Files for SPDR SSGA Gender Diversity Index ETF
    SEC Filings | 12/18/2015

Because… Besides SSgA, Goldman Sachs and Hartford also filed for the S&P 500 Environmental & Socially Responsible ETF and Hartford Environmental Opportunities Fund, respectively, last week. The number of firms that incorporate environmental, social, and governance (ESG) factors into their strategies has apparently increased significantly. According to a recent HSBC report, ESG-based investing has grown from close to zero a decade ago to an estimated 30% of professionally-managed assets globally today. However, fund providers should keep in mind that while the ESG-themed investments may resonate with some investors’ values, not all have successfully gathered assets. Solid performance, reasonable fees, and proactive marketing are still needed for ESG-focused products.

2) Victory Capital to Acquire RS Investments
    Victory Capital | 12/18/2015

Because… Despite the lack of high-profile deals, we have witnessed quite a few acquisitions in the asset management arena this year, such as Delaware Investments’ takeover of Bennett Lawrence Management and Calamos’ acquisition of Phineus Partners. The competitive environment, the challenge from passively managed products, and the need for revenue diversification will continue to drive cash-rich firms to explore potential acquisition targets. On the other hand, small and mid-sized firms feeling pinched by rising operational costs and limited resources will look for opportunities to widen their distribution network.

3) Vanguard to Expand Active Fixed Income Offerings with Broadly Diversified Core Bond Funds
    Vanguard | 12/21/2015

Because… Vanguard only offers the Emerging Markets Government Bond Index Fund, so the filing of an actively managed Emerging Markets Bond Fund will fill a major product line gap. Industry-wide, 17 out of 99 Emerging Markets Bond mutual funds and 3 out of 22 Emerging Markets Bond ETFs had assets of more than $1 billion as of the end of September, indicating the competition in this asset group is less intense than in many other asset categories. While we expect Vanguard to continue its low-cost strategy for this new offering, we believe how the firm will make the case for investing in this market segment and explain its risk control approach are important at a time when investors pulled $8.4 billion from this category this year through November.


Total estimated outflows from long-term mutual funds were $15.15 billion for the week ended Wednesday, December 9, according to the Investment Company Institute (ICI). Once again, all broad asset classes were in the red with the exception of the $825 million in net flows for Municipal Bond, which has remained in positive territory for 10 consecutive weeks. Taxable Bond led outflows with $7.3 billion in redemptions. Investors pulled $5.2 billion from Domestic Equity and a record $1.2 from World Equity. Hybrid funds witnessed $2.3 billion in outflows, nearly twice the amount from the prior week.

 

Source: Investment Company Institute

 


Don't Miss This (12/15/15)

1) Third Avenue to Liquidate Junk Bond Fund that Bet Big on Illiquid Assets
    Reuters | 12/11/2015

Because… The ramifications of halting investor redemptions could be profound. The SEC could contemplate new regulations to better protect innocent investors after proposing a rule in September that would require open-end funds to adopt liquidity risk management programs. Asset managers will have to examine their own exposure to illiquid assets, reassess their liquidity measures and disclosure policies, and address any concerns investors may have. Investors will learn first-hand the concept of liquidity and its role in the investment decision-making. Their demand for a higher level of transparency and caution against illiquid investments could slow down the growth of funds looking to tap into illiquid markets for enhanced returns.

2) JP Morgan to Launch the Diversified Alternative ETF
    SEC Filings | 12/14/2015

Because… According to Morningstar, Alternative ETFs had assets of $44.1 billion as of the end of November. The group raised $8.4 billion this year through November, more than doubling the 2014 flows of $3.7 billion. In comparison, Alternative mutual funds, with assets of $165.4 billion, collected $8.6 billion, declining 54% from the same period a year ago. However, the Alternative ETF category is dominated by leveraged and inverse funds, which accounted for 79% of the total Alternative ETF assets as of end September. The small asset size of Alternative ETFs with hedge fund strategies means it would be easier for the new JP Morgan ETF to stand out from the competition.

3) Retirees Can No Longer Afford to Live on Fixed-Income Investments, S&P Capital IQ and SNL Research Finds
    PR Newswire | 12/15/2015

Because… A recently published Prudential study discovered that 40% of millennials aren’t saving for retirement at all and those who are aren’t investing aggressively enough. Both reports point to the need to increase allocation to equities. Some target-date fund providers have already realized the problem of insufficient retirement savings and adjusted asset class weightings accordingly. More importantly, asset managers should make the investing public aware of the consequence of being too conservative and teach them how to use analytical tools to find the gap between their current assets and potential retirement income needs and how to refine their portfolios to respond to the changing market environment and adapt to new financial realities.


fuse survey
Currently, passive strategies account for 23.8% of mutual fund and ETFs assets under management. What will that number be in five years? 25%
30%
35%
40%
Greater than 40%
Conferences

Past
ICII
General Membership Meeting
- 5.01.13
(3.6)
ICI
Mutual Funds and Investment Mangement Conference
- 3.17.13
(4.2)


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