In his last full year as Deutsche Bank’s head of mutual fund research, Vince Regan and his team met with 1,300 different fund managers. Following each of these pitches, a hopeful salesperson would call, asking what he thought. “I’d be polite,” Regan says, “but the truth is, I’d rarely spend another second thinking about a fund after leaving the meeting.”
Regan – who now advises asset managers on how to position products to appeal to wholesale clients – was a fund selector for over 14 years, first with Tilney, focusing on UK wealth management, and then, by way of acquisition, with Deutsche Bank. There he was responsible for compiling “The List”, the select funds that would be offered globally by the bank’s advisory services. This list used to be 900-funds strong, but in recent years, global financial institutions have been getting ever choosier: by 2012, the time Regan left, it was cut to 350.
By Regan’s estimation roughly 100,000 funds are clamouring to be picked. He’s convinced that this vastly oversupplied market underpins almost all the major issues facing fund marketers today.
Fund managers need to improve their pitching
When considering a fund, Regan explains, the two main things selectors want to hear from a portfolio manager are the investment philosophy and the investment process. The first ought to be very short; the second should take up the bulk of the pitch.
The investment philosophy is a brief statement of how managers believe they can generate outperformance. Most fund managers, he feels, struggle to encapsulate a selling point. Instead, they’ll revert to top-bottom or bottom-up lingo, and spend a great deal of time touting the merits of the fund’s asset class. “Out of a 45-minute meeting, which the sales guy would have fought hard to secure, 15 are spent on why European equities are great. The fund selector, whose job is to select from within the asset class, is already bored.”
Where time should be spent, Regan says, is on showcasing the process. “This is absolutely the most important thing. A fund manager is asking me to give them our clients’ money. I can’t sit next to them and observe them managing it, so I need to know what their day-to-day looks like.” More specifically, selectors want to see the practical application of the investment philosophy: how are stocks found, and how are they picked? When are they bought and when are they sold? How are they challenged and researched in between?
Fund pitches often feature heaps of stock examples, detailing why certain holdings are attractive. Regan considers this a waste of time. “A good selector would say, I don’t care what this stock is, but use it to talk me through why this company would fit with your investment philosophy and how your process led to this holding.”
An equally common time sink is fund performance. A fund selector, he says, enters a meeting fully aware of how the fund’s been doing. All they want to see is one slide, showing everything they’ve been told about the philosophy and how the process stacks up.
Do we need it?
In Regan’s experience, portfolio managers often approach the pitch as if a fund is judged in absolute terms. But this is rarely the case. More likely, a fund competes with those already on the list and needs to offer a better story. As ever, whether a story is captivating depends on who’s listening, and a successful pitch must take the client’s distribution channels into account.
“Selecting for a UK wealth manager, 85% of the business was discretionary, and there were roughly a hundred people managing money for clients”, he explains. “It’s these hundred people I would have had to convince that a fund was right for us. That’s a very different set-up to a global financial institution, whose business is 75% advisory and has thousands of relationship managers. Not only do they have to phone a client every time they want to move money, they’re also bombarded with other propositions: anything from structured products to hedge funds and real estate ideas”.
Discretionary investors tend to take a “building blocks” approach – segmenting markets by region and profiling risk and volatility – and are therefore more receptive to fund strategies laid out in such terms. Faced with, say, a climate-change fund, a purist investor may consider the topic important but remain unconvinced of the investment proposition. But for the advisory business, it’s great for a fund to have a story: climate change funds, water funds or blended products will all be far more suitable for an advisory channel.
Then, there’s the seemingly dull issue of infrastructure. Regan says:
“The ability to do business is almost as important as the investment proposition”
Selling a fund that targets a broad base of clients (for example, a global equities fund) yet is only registered for sale in the UK and Switzerland is effectively asking the fund selector to double up their work, and look for an additional fund to serve other markets. Instead, says Regan, a fund selector is likely to opt for products registered in as many markets as possible, even if this means choosing a fund whose performance is slightly weaker. From a global bank or a wealth manager’s perspective this is justified, because it means they chase fewer fund managers, allowing for a better service to their own clients.
Regan says he’s often encountered reticence about registering funds in multiple markets without inflow guarantees but warns this attitude could lead to a significant loss of business: “Yes, registering in Singapore is a cost, and you may not end up seeing that much money coming in from Singapore. But without registering there, you won’t be able to get the billion dollars in Germany.”
Follow the path of least resistance
The oversupply problem has been compounded by the dash to passive, leaving asset managers with less money to chase. But Regan is sceptical of the boom in exchange-traded funds:
“Many ETFs are structured products masquerading as liquid products, and people are taking positions mistakenly believing ETFs are as tradeable as stocks.” He also feels a bubble is brewing: “Passive instruments are perceived as cheap and, sure, fees for an S&P 500 ETF are priced at five basis points. But emerging-market ETFs are priced at 50-75 bps, edging closer to active management fees. And unlike passive instruments, actively managed funds offer the opportunity to outperform.”
Regan believes the next two decades will see a significant drop in the appeal of ETFs, likely spurred by a liquidity squeeze, particularly in the more esoteric asset classes.
In the meantime, he thinks asset managers are best advised to follow a holistic approach. Even if a fund isn’t the absolute best in class, its prospects can be boosted by helping a fund selector tick as many boxes on their mental checklist. This includes the philosophy, the process, the distribution positioning and the fund’s marketability.
Don’t drop the ball on asset retention
According to Regan, the most common reason for taking money out of funds is still the departure of a manager. Other than that, the fund list will be revised to reflect an updated view on markets, cutting back, for example, on US equities, or looking at emerging markets in more detail. The funds perennially at risk are those that don’t sell: “People forget that getting onto the list doesn’t mean inflows. If the fund isn’t selling, a client will either try and sell it more aggressively or take it off the list”.
That’s when communication with the asset manager is most important: “Don’t leave clients feeling like once you’ve taken their money, they never hear from you again”. Clients appreciate timely and concise commentaries that show adherence to the philosophy and process.
Regular engagement with the client portfolio manager is also important, especially when a fund performs poorly. Regan says that being proactive by explaining underperformance and how management is responding can make all the difference. “It’s still the norm that asset managers won’t call when performance is bad. You remember the ones who do.”
Vince Regan can be contacted at Vincent.email@example.com
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