Cerulli Asks Whether It Is All Over For Mutual Funds

For the first time since their creation, open end mutual fund launches were eclipsed by the combined introductions of other vehiclesETFs, closed end funds, and variable annuitiesin 2007. This sounds a warning bell of sorts for mutual fund managers. While

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For the first time since their creation, open-end mutual fund launches were eclipsed by the combined introductions of other vehiclesETFs, closed-end funds, and variable annuitiesin 2007. This sounds a warning bell of sorts for mutual fund managers. While Cerulli maintains its view that mutual funds aren’t headed for extinction in the foreseeable future, the cumulative impact of these and other alternative vehicles, including structured products, funds of funds, and collective and commingled trusts, poses a significant threat.

At the same time, fresh thinking about Modern Portfolio Theory (MPT) is influencing product development and spawning an array of new alternative investment strategies and asset classes structured as both 1940 Act and non-mutual fund products. The rise in retail alternative investment strategies and products forces retail third-party asset managers to reflect on the potential implications for traditional products.

Assets in equity mutual funds that do not fit into the nine style boxes have more than tripled since 2002. The increased array of alternative strategies in recent years is challenging product marketers as they seek to position their funds amid evolving portfolio construction.

“Portfolio construction evolution is shaping how platforms and advisors construct portfolios, and ultimately the demand for certain products and strategies,” says Cindy Zarker, director of retail asset management research, Cerulli Associates.

Nearly two-thirds of asset managers report that the evolution of portfolio construction and Modern Portfolio Theory is having a large impact on their retail third-party product development strategy. This updated thinkingcoupled with Baby Boomers’ changing needs as they shift into retirement modeis influencing the portfolio construction of both new and established products. These changes are also influencing which products and strategies distributors use to meet their clients’ needs, and ultimatelywhich products gather and retain assets.

“Financial engineering offers the potential for product architects to dial up or down principal protection, return, yield, and other factors when designing new products,” says Zarker.

The evolution of portfolio theory is not just academicdeveloping theories are being translated into practical application. Portfolio construction evolution is influencing how platforms and advisors construct portfolios, and ultimately the demand for certain products and strategies. These changes, in turn, are influencing retail third-party distribution-focused asset managers in almost every element of their business from their manufacturing, and related merger and acquisition strategies, to their product and distribution strategies.

Asset managers must develop their retail third-party product and distribution strategies in the context of their role in an investor’s comprehensive portfolio solution.

Asset managers play three principal roles in investors’ portfolios: as an investment strategy solution; an allocation solution; or a portfolio solution. Depending on the role in which they are operating, the implications for their business models vary. As an asset manager’s role shifts, the transition may influence its distribution approach, role in fee negotiation, need for certain investment expertise, and other decisions.

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