By Daniel Enskat
$250 billion in net flows to equity and fixed-income funds in the first half of 2009, the best performance for stocks in any quarter since the late 1990s and the 20th consecutive week of positive long-term mutual fund flows through mid-August 2009 helped draw investors cautiously back into investments. Especially emerging markets and Asia are described as having turned the corner to once again lead the way as a growth driver for the industry.
Emerging Market Aggregate Demand Transforms Distribution Landscape
"Emerging markets are providing an increasing portion of our sales revenue", Europacorp CEO Jean-Julien Baronnet said in a recent FT article, emphasizing that aggregate demand from emerging markets is transforming the landscape for distribution.
This could have been a statement from an asset management CEO, but in this case Baronnet was talking about film distribution. Europacorp was founded by Luc Besson and a recent animated movie, "Arthur & the Invisibles" (with Robert de Niro, David Bowie, and Snoop Dogg), brought in about $115 million at the box office worldwide, despite an only lackluster contribution of $15 million from the US.
Focusing on movies with cross-border appeal, Europacorp plans to produce more "melting-pot" movies, mixing actors and cultures in non-traditional ways. The importance of emerging markets and the success of "melting-pot" funds also dominated the global fund industry of late.
All of the ten best selling new fund launches in both May and June globally came from Asia. In June 2009, those ten funds, highlighted below, attracted in excess of $7 billion combined. Noticeably, almost all of the Japanese offerings were co-branded "melting-pot" funds, mixing actors and cultural themes, among them Nomura Pictet Genome, Nomura RCM Green Tech or Fortis Nikko China Equity.
Enter BRIC, the Dragon and the Komodo, But Don't Forget the U.S. and Europe
In 2001 Goldman Sachs coined the term "BRIC" in a research paper to highlight the importance and growth potential for Brazil, Russia, India and China1.
Then, Schroders at the end of 2007 within a few months raised over $10 billion in net flows to a local BRIC fund in Korea2, and industry observers suggested to complete the "BRIC-K" by adding Korea to the mix.
Now the head of Indonesia research at CLSA Asia-Pacific Markets put out a research note entitled "Chindonesia: Enter the Komodo"3, hoping to push the triangle of China, India and his area of expertise, Indonesia (the Komodo is a reptile indigenous to eastern Indonesia).
And indeed, looking at the ten bestselling funds across Asia for the first half of 2009 below also shows products from Southeast Asia, albeit mostly institutional, including multiple entries for India and Thailand.
Yet, while emerging markets as an investment and distribution theme are becoming more important for the industry, it is still too early to announce the era of the "Komodo" - or the "Dragon", for that matter. As highlighted in the table which follows, less than 10% of the $250 billion committed to long-term funds globally year-to-date came from Asia.
|Global Mutual Fund Net Flows, 1H 2009
|Source: Strategic Insight Global.
New vs. Old and Themes vs. Asset Allocation
Furthermore, comparing the top selling long-term funds in Asia to Europe and the US, we observe "New vs. Old" and "Thematic vs. Balanced" buying patterns.
As shown below, in the US, PIMCO's Total Return fund alone gathered over $20 billion in net new money in the first half of 2009 ($25 billion through July 2009, to a total of $170 billion in assets), followed by the Vanguard Total Stock Market with over $6 billion in flows.
In Europe, boutique manager Carmignac topped the list with almost $7 billion in new money in France and across Europe to its Patrimoine product, alongside a number of institutionally driven corporate bond funds and selected themes including high yield, total return and world mining. Other funds with more than $1 billion in net inflows included capital protection vehicles (DWS Rendite Plus Garant, $1.3 billion) as well as themes (Julius Baer Physical Gold, $1.2 billion).
With top selling funds we currently see a mix of investment solutions around balanced and asset allocation strategies on the one end of the spectrum, and themes as well as sectors (often including ETF structures) as building blocks for such solutions on the other end of the spectrum.
By region the data shows an emphasis on existing products in the US, new funds in Asia and mix between the two in Europe. Those product development/management trends are mostly a function of whether an industry is primarily driven by retirement needs of retail investors (401k plans in the US, Superannuation in Australia, etc).
The US mutual fund association, ICI, in early 2009 published a study on "Characteristics of Mutual Fund Investors, 2008"4, finding that 95% of mutual fund investors were focused on retirement saving. Thus, while in less developed markets the focus is on getting investors to move from a savings to an investment mentality, often via new and exciting products, the US and Australia face a different set of challenges around investors' retirement needs.
A recent study by the PewResearchCenter entitled "Different Age Group, Different Recessions" provides useful lessons for mutual fund companies on which type of client suffered most during the downturn and what it means for their retirement plans and investments5. Key findings from the report include:
Investment Losses, By Age Group: 71% of investors between 18-29 and 56% of investors over 65 had NO losses or NO investments, sharply different from the age group 50-64, called the "Threshold Generation", where one third lost 20-40% of their assets.
As a result, 75% of those "threshold" investors say that the recession will make it harder for them to meet their retirement needs. Importantly, 58% of threshold investors stated that the recession has caused stress in the family, while 58% of investors over 65% stated is has NOT caused stress in the family.
Retirement savings took a substantial hit in 2008 and investment managers/distributors need to rethink how to connect with investors (before/throughout and after the crisis), how to educate them effectively and what kind of products to provide.
When it comes to emotional and behavioral aspects of investor decision making, Kahneman and Tversky pioneered so-called "Prospect Theory" and received a Nobel prize in economics for their work in 2002. One of Kahneman's collaborators, University of Chicago professor Richard Thaler in a recent book called "Nudge" noted that it seems reasonable to say that people make good choices in contexts in which they have experience, good information and prompt feedback, for example ice cream flavors, while they do less well in areas where they are inexperienced and poorly informed and in which feedback is slow and infrequent, such as medical treatments or investment options.
His advice is for investment management companies and distributors to become "choice architects" - providing advice in a way that makes sense to the relevant client segment or age group and that solves the fundamental conundrum of choice: with too much choice investors get overwhelmed and fall into a state of inertia, too little choice leaves them bored.
Steve Jobs with his dislike of keyboards and manuals famously had the iPod created with only one button. One fund is not enough, but the increasing concentration of new flows to blockbuster products and managers highlights the importance of getting product design and advice right - or face extinction, like the komodo's former next of kin, the dinosaur.
About Daniel Enskat, Head of Global Consulting and Senior Managing Director, Strategic Insight
For almost a decade, Daniel has led the development of Strategic Insight's Global fund research and consulting effort, and is widely sought after for presentations, discussions, and his perspective on the global asset management industry by associations, academia, regulators, the media and management boards of the firm's over 250 clients worldwide. He has written extensively on the fund industry, including various books on Asia, the Middle East and Global Fund Distribution (www.globalfunddistribution.com/about-the-authors).
Goldman Sachs, Global Economics Paper: 'Building Better Global Economic BRICs', November 2001.2.
Schroder BRICs Equity Feeder, a local Korea fund launched in late 2005.3.
CLSA Asia-Pacific Markets: CIO Notes, July 2009 - https://www.clsa.com/assets/files/reports/CLSA-chindonesia-cioNotes-20090804.pdf4.
Investment Company Institute, Research Fundamentals: Characteristics of Mutual Fund Investors, 2008; http://www.ici.org/pdf/fm-v18n2.pdf5.
The report was released on May 14, 2009 - a full version of the report is available at http://pewsocialtrends.org