The investment business is full of twists and turns, and it is not just portfolio managers and analysts that have to constantly read the changing winds; as a marketing professional you must also adapt as the market changes. The last few years have been tough for mutual fund marketers, with investors leaving this product for ETFs and moving assets from equity products to those that specialize in fixed income.
We believe that U.S. equity mutual funds are at an important inflection point, and you need to be ready to take advantage of these changes. After years of redemptions, we see real signs of life in this investment product. To leverage these shifts and gain assets, however, you must know why this shift is occurring and adapt your marketing plans accordingly. The mutual fund "empire" is returning, but we must anchor our growth plans on the industry's recent history and the current competitive landscape.
HOW WE GOT HERE
The financial crisis of 2007-2008 was especially hard on the domestic equity businesses of U.S. mutual fund companies. From 2007 to 2013, the investors pulled $601 billion from listed stock funds dedicated to U.S. equities.About half of those money flows went into world equity products, to the tune of $296 billion.The remainder - and then some - fled to the relative safety of fixed income products.Bond funds saw $1 trillion of inflows over the same period, even with the concerns last year over the municipal bond market sparked by Detroit's bankruptcy.
To put a finer point on this, since the March 2009 lows on the S&P 500, mutual fund investors have sold $361 billion in U.S. stocks by redeeming their mutual fund holdings in this asset class.In doing so, they missed a powerful rally that took the broad market from the March 2009 intraday low of 666 on the S&P to where it trades today - at 1860 or so. So if mutual fund owners were selling consistently as markets rose, who was buying?
One simple answer is investors who choose U.S. listed ETFs as their investment vehicle of choice.Consider the following data points:
* Over the last five years, money flows into ETFs totaled $558 billion.Total assets under management total $1.7 trillion.
* ETF investors are predominantly focused on equity markets.Three quarters of all ETF assets - some $1.3 trillion - reside in funds that invest in stocks rather than bonds.
* Money flows over the last five years are, not surprisingly, also pointed at the equity end of the investment spectrum. These total $412 billion, or 74% of the total.
Taken as a whole, all this data tells a clear story: mutual fund investors have been net sellers of U.S. stocks since the bottom, and ETF investors have been among the most visible buyers.
MUTUAL FUNDS DOWN, ETFs UP: WHY?
As we speak with ConvergEx's institutional clients, many of whom are either active investors or ETF sponsors, the reasons for this dichotomy become clear:
* ETFs have a broader and growing base of potential and existing customers than mutual funds.Hedge funds, for example, are active ETF users both on the long and short side. Long-only managers use levered products such as double and triple-long ETFs to provide incremental returns based on proprietary market-timing models. Mutual funds, by contrast, still own much of the 401(k) and registered investment advisor space. One large RIA service company shows a pie chart of where their customers invest at their annual customer meeting. The split they showed at their 2012 conference was +40% mutual funds and less than 5% ETFs.
* There is also a generational split to consider.ETFs are popular with younger investors - below the age of 40.Mutual funds still hold sway with older age cohorts, many of whom bought their first funds during the industry's boom times in the 1980s and 1990s.Younger investors tend to have higher risk tolerances since they are still approaching their peak earnings years, so it should be no surprise that they favor equity investments with their incremental savings.
* With growth comes resources. The SPY ETF was the first ETF offered in the U.S., some 21 years ago.It was a simple index fund, with the attendant low costs and tick-by-tick transparency.Its success was the bedrock of an industry which now has over 1,500 products and rarely grows at less than $10 billion a month.That proven opportunity means sponsors and managers are constantly looking for the "next big thing" in the ETF ecosystem.
The upshot of all this is an important lesson for mutual fund marketers.First, take the time to make sure your sales organization knows all your products inside and out. ETFs have added a lot of offerings in the last few years, but there are still many more mutual funds listed in the U.S. than exchange traded options.Second, take the time to train salespeople on growth equity products - those are the ones most likely to catch the eye of ETF-oriented younger investors.Lastly, make sure to get your portfolio managers on the road this year.Investors and their representatives always appreciate meeting the people who manage their money. And in the end, the investment business is all about the people.
Oliver Bailly is senior vice president and head of ConvergEx Group's ETF desk. Nicholas Colas is ConvergEx Group chief market strategist.