In today’s digital age, informed investors are purchasing investment products and services from an ever-expanding variety of new channels at lower costs. Despite being cost-conscious, consumers have demonstrated they are still willing to pay more for what is perceived as “luxury” or difficult to obtain. During SS&C Deliver this year, leaders across the business explored what these trends mean for asset managers. You can catch a recap here.
Featured prominently in the headlines, is a decade-long shift toward lower-cost investments in index-based mutual funds and ETFs. In July 2018 alone, asset flows into passive U.S. equity funds was $14.1 billion, compared with the active fund front, where investors withdrew $11.2 billion, according to Morningstar‘s Direct Asset Flows report. Massive managers continue to gobble up market share as they race to zero (e.g. Fidelity zero fee funds) and make revenue through securities lending versus product sales[i].
For investment managers without the scale of Vanguard, Blackrock, Capital Group and other large firms, there are several product innovations to help them compete in the new age of investments:
- Exchange Traded Funds (ETFs) – Low-cost products that enable unique passive indexed strategies. Recent successes have taken advantage of popular themes and trends, such as the “BOTZ” ETF which rode the robotics wave earlier this year[ii].
- Collective Investment Trusts (CITs) – Defined Contribution and Benefit products that are sponsored by trust companies, these structures enjoy lower operational and distribution costs since they are not under the purview of the SEC. Our research shows that assets in CITs, particularly in DC plans, could surpass the $3 trillion mark by the end of 2018, up from $1.9 trillion at the end of 2015[iii].
Beyond the massive shift to passive index-based mutual funds and ETFs, retail investors are showing an increasing appetite for non-correlated assets as a means to diversify their portfolio and posture for the next market downturn. Strategies like credit, private equity, real estate and real assets have long been available to institutions and high-net-worth investors in the private markets. Now managers are identifying ways to deliver these private market strategies to the retail market.
- Daily NAV REIT – Blackstone launched their Real Estate Income Trust in 2017 and saw steady growth through the underserved wirehouse channel. A handful of firms followed by launching similar productsiv.
- Interval and Tender Offer Funds – Traditional asset managers are offering strategies in private equity, private debt and real estate to deliver non-correlated solutions to retail investors – often partnering with subadvisors or boutique with particular expertise. Further, BlackRock, the world’s largest asset manager has publicly stated that expanding private investment activities has become a priority – exemplified by their acquisition of Tennenbaum Capital Partners, enhancing their private debt capabilitiesv
On the interval funds front, common strategies we are seeing include:
- Credit: Griffin Capital who already sponsored a $2.3B Real Estate interval fund, in 2017 launched their Institutional Access Credit Fund (“Credit Fund”), an income-focused global credit solution that is designed to provide individual investors with a portfolio of actively-managed debt securities. The Credit Fund is actively managed by Bain Capital Credit and has already raised $130M[iv]i
- Private Equity: Pomona Capital, an affiliate of Voya Investments that sponsors a number of PE funds, launched the Pomona Investment Fund, a private equity tender offer fund available to retail investors in 2015vii
- Real Estate: BlueRock, launched their Total Income + Real Estate interval fund in 2012 and recently converted to ALPS, a division of SS&C, raised $56M in August 2018 alone, bringing the fund to $1.2B in AUM[v]i
For more information on interval funds, download our whitepaper here.
We help investment managers plan, launch, grow and provide ongoing support to all retail products with scalable technology, outsourced servicing solutions and deep domain expertise. If you’re considering launching a new retail product, contact us for a strategy meeting to learn more.
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