Product Strategy Compass

A Collective Investment Trust (CIT) is an investment vehicle that pools the assets of individual investors in order to buy a collection of securities. In this sense, it resembles a mutual fund and it offers many of the same benefits. However due to CITs’ unique history and structure, today they generally offer lower fees than mutual funds and have become an increasingly popular option among defined contribution (DC) plan sponsors, especially 401(k) plans.

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As economies around the globe decelerate, institutional investors — pension funds, sovereign wealth funds, insurance companies and banks — who are responsible for nearly 70% of the $66 trillion of worldwide assets at mid-2018, face some new market complexities. Rising volatility — and lower returns — are placing pressure on balance sheets that were already struggling to meet obligations due to mounting debt and liabilities.

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In the late 2000s, new financial entities dubbed “robo-advisors” stormed onto the investing scene and were quickly viewed as disruptors that threatened to overturn traditional financial advising. Most of the early entrants were start-up firms, adopting a Silicon Valley approach to business by pursuing venture capital funds and appealing to a younger, more mobile client base. Over the next 10 years, traditional financial institutions began to enter the market, either by acquiring the early start-ups or by developing their own proprietary robo-advisory technology.

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As asset managers scan the distribution horizon, looking to expand their products’ reach and gather new assets, the timing may be right to re-examine opportunities in the insurance channel. As in most other channels in the financial ecosystem, disruption is no stranger in this one, and it is driving insurers to rapidly redesign their financial and risk strategies and reengineer their business models and products. It’s a transformation that is expanding the opportunity to tap meaningful assets of insurers in new ways.

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It is no secret that hedge funds delivered disappointing returns in 2018. Many funds were thrown off by rising volatility and political uncertainty, and on average, hedge funds lost 6.7% in 2018, according to the HFRX Global Hedge Fund Index. This is more than the loss of the S&P 500 Index, if reinvested dividends are included. These lackluster returns compare to the respectable, if not overwhelming, returns of 8.51% in 2017.

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A reinvention is underway: as advisors and wealth managers recalibrate their offerings and the way they construct investment portfolios, they are redefining their relationships with asset managers as well. Product transformations within managed account structures and the increased use of models — coupled with the rising demand for technology-enabled products that can be personalized to individual investor needs — are taking revenues away from managers. In fact, the product changes, backed by AI-powered functionality (like JP Morgan’s recent introduction of AI-driven portfolio diagnostic tools to their Portfolio Manager Program), are rapidly shifting how home offices and advisors assemble, access and buy model products. Together, it’s reshaping the playing field — and even changing the players themselves.

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For several years, the financial press has been prognosticating about the demise of active investing, particularly in light of the massive shift in inflows to passive strategies. Articles like “Active Management Isn’t Dead Yet,” which appeared in Bloomberg in August 2018, or the Financial Times' piece, “Active Management Isn’t in a Death Spiral” from February 2018, can certainly give the impression that active managers are an endangered species. As these articles make clear, passive investing has caused a massive sea change, leaving asset managers to wonder whether they can continue to compete against these low fee, asset-gaining behemoths.

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As competition for investors and assets has intensified, and technology and cross-border regulation have extended the reach of all parties in the financial value chain, asset managers have increasingly looked outside their domestic footprints to sell their products and gather assets. And why not? Worldwide regulated investment assets have grown to $49.3 trillion at the end of 2017, with more than half coming from outside of the US.

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The outsourced chief investment officer (OCIO) market has evolved from a small subset of the financial industry in the 1980s and ‘90s into a rapidly growing, highly competitive space. Though an OCIO relationship can be executed in different ways, it primarily entails the asset owner relinquishing investment decisions to a third party. In a more traditional relationship, a consultant may provide advice to an asset owner, but the asset owner makes all investment decisions, like hiring and firing an investment manager or selecting a specific investment strategy to pursue. In an OCIO relationship, by contrast, the OCIO provider assumes responsibility for most — if not all — of the investment decisions. Typically, OCIO providers take over virtually all day-to-day investment activities, including selecting managers, handling portfolio transactions, developing risk control guidelines, and performing due diligence, among other responsibilities.

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“Silicon Valley is coming.” That famous warning – issued by JP Morgan CEO Jamie Dimon in a 2014 letter to shareholders – offered a clear recognition of the sweeping changes that technology has brought in recent years, changes that have been nothing short of extraordinary for the asset and wealth management industry. In this article, we take a closer look at the way technology has transformed alternative investments in particular.

Over the past five years, new platforms have sprung up to satisfy the demand for alternatives among individual investors who previously had little access to these more sophisticated and expensive investment vehicles. Specifically, they enable high net worth (HNW) investors and registered investment advisors (RIAs) to pursue opportunities that had...

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Artificial intelligence (AI) is the buzz across investment management firms these days — and the hype may be warranted. Research indicates that by 2030, AI and other digital labor investments made by investment management firms across front-, mid-, and back-office operations are projected to save $200 billion, impacting close to half a million (460,000) employees over that period. Some of these new technologies — like big data analytics and machine learning — are expected to offer managers a cost savings of $42 billion in research and portfolio manager compensation alone. And while specific financial impact estimates vary somewhat across firms, the numbers invariably provoke a fundamental reconsideration of what investment management will look like in just a bit over a decade.

Some experts project that these new...

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The international retirement market is vast, complex, and growing rapidly. Almost every country runs its own public pension system, governed by specific laws. In addition, different regions have distinctive, often entrenched, financial systems that shape how retirement vehicles are structured and distributed. For example, while asset managers dominate the US retirement market, banks and insurance companies are the primary suppliers of retirement products in other parts of the world.

Despite these variations, retirement systems in every country generally rely on the “three pillars” framework outlined by the World Bank in the 1990s: 1) a public, state-sponsored pension plan; 2) an employment-based plan; and 3) voluntary, personal finance products, which governments often incentivize through tax breaks.

Worldwide, the retirement market is expanding quickly...

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Separately Managed Accounts (SMAs) are no longer just a product reserved for institutions and the ultra-wealthy. Increasingly, they are a solution for retail channels and are being sold by brokers and wealth advisors in their fee-based Managed Account offerings. But often these are not the same traditional SMAs with which some managers are familiar. Rather, they are model-based SMAs – and they have some different resource and revenue implications for managers that alter their customary SMA business and delivery models.

In this article, we broadly examine some of the new SMA product structures and technologies, the distinct revenue and asset opportunities associated with them, and the varying degrees of technology and distribution-related expenses that come with an SMA venture today. At a more granular level, we also review...

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“Fixed income smart beta funds, much like winter, are coming.” - Sara Shores, Head of Strategy for BlackRock’s Factor-Based Investments

Undoubtedly, passive investment products are dominating equity fund inflows, especially among US investors. But what about in the fixed income universe, where active management has long dominated? Will passive investments reshape that space as well, threatening fees in the same way they have transformed the equity landscape?

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What’s in a name? Plenty when it comes to Multi-Asset Class funds (MACs).

MACs have had many different names during their history, including balanced, hybrid, dynamic or tactical allocation, “go anywhere,” risk parity, absolute return, and diversified growth. Most recently, they have settled into their next generation name as multi-asset. And that appears to have some staying power and global acceptance – with Morningstar reporting MACs were one of the largest beneficiaries of European market flows for the last five years.

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Investors have raised concerns about the social impact of their investments for at least 50 years. In the 1960s, political causes like the civil rights and anti-war movements prompted certain investors, primarily in Europe and the US, to question the policies their assets were supporting. As a result, these investors sought to exclude certain companies and industries from their portfolios. This approach to socially responsible investing (SRI) continued into the 1980s when many individuals and institutions pulled their assets from South African operations as an objection to apartheid.

Over the past 20 years, SRI has moved far beyond simply excluding objectionable investments to identifying certain positive attributes – ones that investors not only support but that can also generate superior returns. These factors – typically classified as Environment, Social, and Governance (ESG) – include a company’s energy use, its legal and compliance efforts, the working conditions it provides, and its corporate governance structure. ESG investing seeks the same objectives as traditional investment approaches: superior, risk-adjusted investment returns. In fact, many ESG investors assert the best way to achieve such returns is by including these factors explicitly into the investment process. Today, SRI is no longer solely about excluding certain companies’ shares and trying to play “catch up” with a benchmark using other investments. Instead, ESG managers believe that socially responsible investing is good for portfolios, as well as for the planet...

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• "Managers are always pushing the hot or top performing product without asking what we need.”
• “Be more honest about their performance and fees.”
• “Do a better job listening.”
• “Managers don’t know the platform and what we do.”
• “Share high importance information in a timelier manner.”
• “We lose trust in firms that do not proactively share negative news.”
• “Focus on what makes them different and what is unique about their process.”
• “Reaching out more than once a quarter is overkill and tends to annoy my analyst team.”

These are some of the direct quotes we received from Product Research and Due Diligence managers at an array of wealth management organizations we recently surveyed, asking them about the sales, product, and support efforts they’ve experienced from fund groups. In selecting the survey group, we attempted to identify those we believed to be influential product gatekeepers whose power and authority has grown in the last several years within their respective organizations. As a result of heightened Department of Labor (DOL) fiduciary regulation that increases the disclosure requirements for advice providers, coupled with the advent of digital advice and technology, a firm’s research/due diligence group has clearly emerged as an important touchpoint on the distribution trail that is wielding significant power when it comes to deciding with which products and providers their firms do business.

In this article, we’d like to provide a springboard for managers to continue upgrading their product and distribution efforts in the new era of asset management, and the survey offers a framework for what firms are doing now — and how they can improve.

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