Net Interest - A Marketer's Guide to Fund Management
A Marketer's Guide to Fund ManagementPlus: Apple, Clearing Houses, Payment For Order Flow
Sentieo An experienced editor at a leading finance publication once advised me never to write about ESG. “No-one will read it,” he said. Rather than writing about ESG, then, I’m going to write about marketing – specifically, marketing in the fund management industry. All businesses need a good marketing plan, but for fund managers, it’s an especially important part of the business model. Two reasons: First, fund management is a highly competitive industry. There are over 10,000 mutual and exchange-traded funds in the US alone, with many thousands more overseas. Add in hedge funds and other investment partnerships and the choice balloons. Distribution is hard, but the barrier to entry for a new fund is surprisingly low. Over the years, fund management companies’ marketing strategies have evolved. Distribution has remained a big part. In Europe, tied distribution of mutual funds largely through banks explains a big part of the competitive landscape. The largest fund management company in Europe, Amundi, has historically generated around 40% of its assets from affiliated banks. But other elements are important too, including past performance and cost. Past Performance is No Guarantee of Future ResultsTraditionally, investment firms promoted their products based on past performance. The strategy makes sense: Past outcomes constitute an important component of decision-making in most walks of life, including many purchase decisions. The reliability of a car or a washing machine, for example, can be ascertained by how it has performed in the past. This is consistent with human psychology – people accumulate experience by observing outcomes associated with past actions and take this experience into account when considering future actions. The problem in the fund market is that it doesn’t work. Odey’s European hedge fund was down over 50% in the seven years leading up to January 2022; ARK’s Innovation ETF was up over 300%. Yet so alluring is the notion that past performance is indicative of future results that funds are required to post a warning disavowing it. Star Fund ManagersA third differentiating factor is personality. While fund management firms have ultimate responsibility for customer assets, customers often have affinity to the person managing their money. Peter Lynch was one of the first mutual fund managers to attract a personal following. He made Fidelity into a household name, growing assets from $18 million to $14 billion over the 13 years he ran his fund. Since Lynch’s time, though, fund management firms have been less keen on using personality to anchor their marketing efforts. That’s because it entails a trade-off between the marketing benefits and the cost of rent-sharing with the individual fund manager. It is also a risky strategy if the firm has ambitions to remain in the market longer than their employee. Fidelity managed the hand-over from Peter Lynch well; other firms have managed transitions less well. When Neil Woodford quit Invesco in 2013, £1.9 billion of assets followed him out the door in the first year. Over the following six years another £8.6 billion flowed out of a fund that once managed £12.9 billion. (Not that it worked out much better for Woodford.) Similarly, Pimco lost $74 billion in assets in the two months following the exit of “Bond King” Bill Gross in 2014. And So to ESGIn the past few years, the number of asset management firms that have signed up to the United Nations’ Principles for Responsible Investment has increased significantly. More than 4,300 firms were signed up at the end of 2021, up from 3,000 in 2000; collectively they manage over $120 trillion of assets. On his full year 2021 investor call, Larry Fink, Chairman and CEO of BlackRock, remarked on the trend: “We have already seen $4 trillion of capital move from traditional investments to sustainability ones in the last two years alone and this is just the beginning.” The firm itself manages $509 billion in “sustainable” assets, double what it managed a year before. The trend is particularly strong in Europe. “In Europe, if you do not have a sustainability lens, you will not be awarded any mandates today,” said Fink. As at the end of 2021, sustainable funds in Europe accounted for a third of the open ended fund and ETF market and half of the flows. In Europe, regulations have already been put in place to ensure ESG funds are appropriately labelled. Late last month, the SEC proposed a new rule to do likewise in the US. In the meantime, the war in Ukraine has raised questions about what “responsible investing” means and has led to a slowdown in ESG-related flows. As intermediaries, a lot of what financial services companies do is manage the waves of supply and demand. But because they are incentivised by volume, they are sometimes prone to create artificial demand or artificial supply. Many of the biggest crises in finance have emerged from this weakness and it is apparent again in fund management businesses. Unlike other crises, it doesn’t have balance sheet implications, but it does have earnings implications. Marketers will have to find something else to do. 1 |
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