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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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Total estimated inflows into long-term mutual funds were $3.05 billion for the week ended Wednesday, January 21, according to the Investment Company Institute (ICI). This represents the second consecutive week of cumulative inflows, yet a 45.3% decline from the prior week’s intake of $5.6 billion. After nine weeks of withdrawals, investors put $856 million into Domestic Equity funds. World Equity gathered $288 million, a sharp decrease from the $1.8 billion collected during the prior week. Municipal Bond led all broad asset classes with $1.0 billion in net inflows while Taxable Bond garnered $77 million. Hybrid funds posted its second consecutive week in positive territory with $790 million in net inflows.

Source: Investment Company Institute (ICI) 

Source: Morningstar Direct

2014 showed a continuing increase of the number of new funds being opened after the high in 2011 of 786 new funds, with 725 funds being brought to market. Open-End funds had 520 new funds added, and there were 205 new Exchange-Traded Funds over the year. The U.S. category with the most funds added for Open-End Funds in 2014 was Allocation with 117 new funds, while International Equity had the most funds added at 80 new funds for Exchange-Traded Funds. 

Don't Miss This (1/20/15)
1) Managed futures funds shine anew, but mystery remains
    Investment News | 1/14/2015

Because… Assets in managed futures mutual funds rose to $14.9 billion as of end November from $11.6 billion a year ago, representing a 12-month growth of 28%. Though it underperformed S&P 500 Index in 2014, the category collected $1.9 billion in the first eleven months, compared with net redemptions of $18 billion from U.S. Equity. The inflows indicate some investors still believe managed futures can be an effective diversifier due to their low correlation with the stock and bond markets. Portfolio managers’ expertise, competitive expense ratios, educational efforts, and brand awareness all play an important role in a managed futures fund’s success.

2) American Beacon Advisors Announces Initiative To Launch Nextshares Exchange-Traded Managed Funds
    American Beacon | 1/15/2015

Because… As the first outside licensee, American Beacon’s move will be closely monitored by other asset managers that are interested in non-transparent ETPs. It is too early to predict whether the first-mover status will give American Beacon any competitive advantage, but it is safe to say that the investors’ acceptance of an investment vehicle without the transparency they normally expect from an exchange-traded product will be put to the ultimate test. We do not expect many active managers to throw their hat in the ring right away. Evaluating how new products will be received in the marketplace can be the approach most of them will take.

3) Americans Overwhelmingly Oppose Changing Tax Incentives for Retirement Saving
    ICI | 1/20/2015

Because… Tax breaks are a major incentive for Americans to save for their retirement. Although the current defined contribution scheme is not perfect, any elimination or reduction of tax advantages would be a grave disservice for individuals who rely on DC plans to build their retirement nest eggs. While the financial industry is trying hard to encourage people to invest in retirement plans, the last thing lawmakers should do is to set up road blocks to curb plan contributions.

Don't Miss This (1/13/15)
1) Vanguard to Introduce Its First Municipal Bond Index Fund and ETF
     Vanguard  | 1/6/2015

Because… We expect the fund, especially the ETF shares, to generate substantial investor interest. Industry-wide, Municipal Bond mutual funds and ETFs garnered $32 billion in 2014, a significant improvement from net outflows of $57 billion in 2013. The new fund could cannibalize flows into the firm’s actively managed municipal bond offerings, such as the $41 billion Intermediate-Term Tax-Exempt Fund, and pose a threat to leading municipal bond ETFs, such as the $4.2 billion iShares National AMT-Free Muni Bond with the expense ratio of 0.25%.

2) Dodge & Cox to Soft Close the International Stock Fund
    SEC Filings | 1/6/2015

Because… The soft close of the Dodge & Cox International Stock Fund may benefit its rival funds in the same asset category. The fund, with $64 billion in assets, is the third largest in the Foreign Large Blend category. It outperformed its benchmark, the MSCI EAFE Index, for all 1-, 3-, 5-, and 10-year periods as of 12/31/14. Such a solid long-term track record has drawn investor attention, as the fund’s net inflows of $11 billion nearly quintupled its 2013 intake. While the firm’s top seller is now closed to new investors, its decision to restrict the fund size and maintain the investment flexibility may help Dodge & Cox win the trust of existing shareholders and prospects alike.

3) IRI Study: Retirement Plan Participants Want Lifetime Income Estimates
    The Insured Retirement Institute | 1/13/2015

Because… The IRI study that reveals the overwhelming majority of consumers want their retirement benefit statements to provide an estimate of lifetime income underscores the necessity of more effective investor education. Online calculators and other resources for income projection are widely available, but many individuals still have no idea of how to make use of these tools. Financial firms need to inform them of the impact of different inputs on the estimate of lifetime income, the availability of retirement income solutions that may suit their needs, and the income withdrawal rate adequate to cover retirement spending.

Strategic Beta ETFs have gained prominence after Morningstar's recent article, which noted that they had 18% of assets for all ETPs in 2013.* While  Morningstar's categorization is useful, we believe it is overly inclusive for looking at the growth and demand for intelligent or smart beta strategies. A quick analysis using index weighting methodologies puts non-capitalization weighted products at about a 12% market share, with what we would classify as smart beta products controlling approximately 8% of total ETF market share by our analysis. Despite the small base, growth has been strong, increasing from about 2% of assets five years ago.

Sources: Morningstar Direct, FUSE Research analysis

* "What You Need to Know About Strategic Beta," September 18, 2014

Total estimated outflows from long-term mutual funds were $1.13 billion for the eight-day period ended Tuesday, December 30, according to the Investment Company Institute (ICI). This represents the fifth consecutive week of cumulative outflows, though an improvement from the prior week’s redemptions of $6.2 billion. Once again, all broad asset classes fell into the red with the exception of Municipal Bond’s intake of nearly $1.4 billion. Domestic Equity led redemptions with $1.5 billion in net outflows while World Equity experienced $63 million in net outflows. Taxable Bond’s $367 million in redemptions was a significant improvement from the $3.3 billion and $10.3 billion in net outflows suffered during the prior two weeks. Hybrid funds remained in negative territory with $602 million in net outflows.

Source: Investment Company Institute (ICI)

Don't Miss This (1/6/15)
1) iShares Leads Global ETF Industry Flows with $102.8bn in 2014
    iShares | 1/5/2015

Because… The record flows into iShares U.S. ETFs more than doubled their inflows in 2013. The firm’s ability to maintain its dominance despite the fierce competition bespeaks the effectiveness of its product and distribution strategies. The reduction of its expense ratios, the expansion of its Core series, the integration of ETF and mutual fund sales forces to enhance cross-selling opportunities, the introduction of funds beyond the broad market-based product range, the thought leadership efforts to educate investors and advisors, and the penetration into wirehouse and RIA channels have all contributed to its success.

2) Morningstar Announces Nominees for 2014 U.S. Fund Manager of the Year Awards
    Morningstar | 1/5/2015

Because…. Besides recognizing portfolio managers, the Morningstar nominations could potentially draw investor attention and help these asset managers gather new assets. While the majority of fund managers work for large firms, a few nominees are from small boutiques. It is interesting to note that Vanguard teams show up in four out of five categories, although the firm is well-known for its passively managed products. The outperforming actively managed funds may have been overshadowed by their more popular index-based siblings, but they can still shine for believers of the active management approach.

3) Behind a Bad Year for Active Managers
    The Wall Street Journal | 1/5/2015

Because… The report that “only about 13% of actively managed, large-company stock funds posted returns above that of the S&P 500 for 2014” won’t bode well for actively managed funds. However, actively managed fund firms should not get too discouraged. FUSE research shows that passive funds had a 25.2% share of long-term fund assets through the end of September 2014. While they are stealing market share from active strategies, active asset managers can still find opportunities if they adopt an out-of-box investment approach, minimize operational costs, put limits on fund size to keep funds nimble, and make more investors aware of their risk control mechanisms.

Total estimated outflows from long-term mutual funds were $6.26 billion for the five-day period ended Monday, December 22, according to the Investment Company Institute (ICI). This represents the fourth consecutive week of cumulative outflows, though an improvement from the prior week’s redemptions of $18.3 billion. All broad asset classes fell into the red with the exception of Municipal Bond’s intake of $329 million. On the other hand, Taxable Bond led outflows with $3.3 billion in net outflows. World Equity’s outflows of nearly $1.4 billion surpassed the $1.1 billion pulled from Domestic Equity. Hybrid funds suffered $826 million in net outflows.

Source: Investment Company Institute (ICI)

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%
Greater than 40%

General Membership Meeting
- 5.01.13
Mutual Funds and Investment Mangement Conference
- 3.17.13

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