Mutual funds and ETFs now comprise 30% of equity mutual fund and ETF assets, as passive mutual funds have gathered $961 billion assets under management, up nearly 100% since 2005.

For providers, this means it is imperative to be increasingly mindful about methods of distribution, said Chip Roame, managing partner of Tiburon Strategic Advisors, at the firm's 26th Tiburon CEO Summit earlier this month.

The channels through which money manager capabilities are distributed along with provider marketing efforts are evolving rapidly, with the advisor channel continuing to grow in influence among providers. Roame discusses top distribution and marketing efforts he sees ahead for fund managers.


Defined benefit plans have obviously declined as a channel; however, this channel can still offer large accounts, albeit less frequently and at lower margins. Open-end mutual funds still capture two-thirds of all defined contribution retirement plan flows; this is a competitive advantage of managers of open-end mutual funds. Endowments and foundations both have moderate growth, and often utilize more esoteric strategies.

The financial advisor channels generally have become more important. While insurance agents and bank brokers were the biggest sellers of annuities, they are stagnating channels; hence Roame predicts slow growth for annuities. Wirehouse reps are utilizing more financial advisor directed managed account programs, and in those, they often pick mutual funds and/or ETFs (as opposed to individual securities). The independent advisor markets are slowly taking market share from the wirehouses and other captive channels; independent advisors rely heavily on open-end mutual funds.

The online advice channels are gaining some traction, and often reply on ETFs. In addition, the discount brokerage firms remain a fast growing channel; their flows now go increasingly to ETFs, thus benefiting the ETF managers. The international markets provide huge potential for traditional open-end mutual fund managers, with huge growth in many markets.


Mutual funds, variable annuities and ETFs have substantial flows of $100-$200 billion each. Summit attendees said that open-end mutual funds will stagnate over the next five years. The Vanguard Group, Fidelity Investments and the other top ten mutual fund firms control over half of mutual fund assets under management.

Smart beta funds have net flows of $45 billion, up from $5 billion in 2009. ETFs have net flows of $138 billion, up 400% since 2001 but down from their peak of $187 billion in 2012.

Half of large-cap U.S. stock funds beat the S&P 500 in 2013. The average active mutual fund costs six-to-seven times more than the average passive mutual fund. A thought to ponder about active management according to Roame.

PIMCO has the most assets under management among active ETF families, with $7.9 billion. Alternative mutual funds gathered $37.1 billion net flows, up 150% since 2004. Institutional investor private equity portfolios had a ten year annualized return of 10.0% through 2013, better than real estate, hedge funds and real assets.

Hedge fund management fees fell to 1.37% of assets under management in 2013, after remaining steady between 1.57% and 1.62% since 2006. Hedge fund performance fees fell to 17.3% of returns in 2013, after varying between 17.7% and 18.7% since 2006. Several attendees noted that there are some exceptions said that hedge funds-of-funds are "expensively lame." Several attendees noted that impact-investing growth will be driven by younger investors with money, and that online and discount channels will experience high growth.


Because client needs are evolving, money managers will need to respond with better-tailored products. A good example is the demand for retirement income; this has led to focus on fixed income funds paying interest, fixed and variable annuities, and funds that pick dividend paying stocks, etc.

Another good example, according to Roame, is the demand for diversification after the 2008-2009 recession when many asset classes moved in parallel. This has led to the growth of alternative mutual funds, often with hedge fund like strategies. Target date funds are another good example here; they have become the default in the defined contribution plan market.

Some other product trends are worth acknowledging but don't fit neatly into explanations around channels and client needs. Separately managed accounts have lost momentum; part of their sales pitch was tax efficiency but ETFs have trumped them there, according to Roame. "Annuities never seem to gain the traction one would expect. Comingled trust funds remain a quiet and relatively large business. Active ETFs remain a wild card, while hedge funds continue to spin stories of outperformance although the average hedge fund does poorly," concluded Roame.

Marie Swift is president and CEO of Impact Communications, a public relations and marketing firm.





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