Taking a 3-D View to Fund Development

PALM DESERT, Calif.-Developing products to meet intermediary demands always is a challenge. But a whole new can of worms opens up, once that product hits the market.

At the 2013 Mutual Funds and Investment Management Conference last week, a group of industry participants offered their views on how to meet the demands for new products and keep them relevant to distributors and the ultimate customers.

Investors are still "hung over' from the financial crisis, don't want to lose any more money in the market and are worried about cash flow, said Michael Perry, managing director fo Wealth Management at UBS. As a result, they're looking to park their assets in more global and emerging market equities, alternative and low volatility strategies, he said. Investors also continue to pump assets into fixed-income, master limited partnerships, high-yield and real estate funds.

Between 28% and 100% of net new industry sales in the last 10 years went into new products , according to Thomas Schreier, vice chairman of wealth management at Nuveen Investments. So his firm invests a lot of its people and research in finding out what's new products are being developed in domestic and global markets.

Fund operators may not be positioning their products well for the next generation of young investors and may "require some level of creativity and a different type of thinking from a product development perspective."

Baby boomers also are having an impact on what products are being launched as they move towards income-focus and outcome-oriented investing, according to Amy Duling, senior vice president at DundeeWealth U.S., LP.

"We're in a particularly interesting spot in that we're a small fund shop in the U.S. but our parent company is the Bank of Nova Scotia, which has a very large mutual fund business in Canada and a growing asset management business around the world," said Duling.

"As we think about developing product in the U.S. market, we have to be thoughtful about how we can bring the investment capability that the firm has locally to the U.S. market,'' he says. "We also have to be mindful of the fact that we're a very small fish in a conservative global bank."

Fund firms will do well to develop products that are diverse and can be delivered across multiple platforms such as closed-end funds, separately managed accounts and Undertakings for Collective Investment in Transferable Securities (UCITS). "You don't want to develop strategies that can only fit in one package," Schreier said.

Whatever products firms end up developing, Perry said it's important to make sure that they do what they're advertised to do. For instance, will your absolute return funds lose money along with other more traditional funds during market downturns? Also, are the funds so unique and different that the advisors don't understand it and are incapable of describing it to their clients?

Different service models can give firms a leg up on their competitors. "Aside from what the product menu is, if you can deliver a different service experience to the intermediary, that will make a difference," Perry said.

Nuveen spends a lot of time before and after a launch educating its sale force on their products so they can, in turn, educate advisors on what the funds can and can't do, Shreier said.

During the heyday of the mutual fund industry, "folks used to sit in labs and pump out products," said Joseph Carrier, chief risk officer at Legg Mason.

"Today, I've seen more things either derail or slow product development cycles because of regulatory issues and market issues. Distributors may not have space on their shelves or have other similar products. I think we're better listeners now and doing a better job of looking at horizons in terms of products for tomorrow or 10 years from now and starting to plant the seeds," Carrier said.

Firms can't be "fast followers" anymore because it's hard to jump into the middle of a trend such as the exchange-traded fund trend because of the lack of scale versus established competitors who have already formed an investor base. "Hopefully, folks are doing a better job at research and development than they've historically done in this business because as margins have compressed there is no room to miss and you can't throw everything against the wall and hope it sticks," Carrier said.

Firms should "think in 3-D" in terms of how the products may fit on a distributor's platform and in an investor's portfolio. "Where do you want products to go over time?" he asked. "Products just don't sit out there and exist forever. They have a life."

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