Asset managers are turning their attention away from mutual funds toward products including exchange-traded funds and separately managed accounts, according to Cerulli Associates.
The Boston-based research firm found that 69% of 100 surveyed asset managers listed their top priority as building out new vehicles. Another 62% said that building out or delivering illiquid alternative capabilities is their highest priority, while 46% said their top priority is building or delivering customization at scale.
Those priorities align with a general shift away from mutual funds to products better suited to accommodate those priorities, Cerulli said. One alternative is separately managed accounts, as 83% said that there are opportunities in those products.
“The use of separate accounts aligns with firms’ initiatives to deliver customization and serves institutional clients that expect customized solutions to meet their unique needs,” said Matt Apkarian, associate director at Cerulli.
That customization has allowed asset managers to create an account geared toward the investment style and ethics of the investor, he added.
“They’re able to incorporate those restrictions that could be value-based tilts,” he said. “That can be incorporated into the management of a portfolio of individual accounts that is in many cases making the separate account more appealing because you can get something that’s built custom for you.”
Another aspect that has made them more attractive to the industry is the introduction of fractional shared trading, which Apkarian said allows robo-advisors to use separate accounts.
“The introduction of fractional shared trading has been able to bring minimums down in separate accounts which has been able to spur the proliferation of robo-advisors that can include some model-driven separately managed accounts,” he said.
ETFs are another alternative that asset managers are gravitating toward in lieu of mutual funds. Twenty-five percent of asset managers who currently do not use ETFs in their plan said they will start to in the next 12 months.
The responses were split in half over those who are looking to build out new products and those who plan to replace existing strategies. The idea of converting existing mutual funds into ETFs has been a practice that several firms have executed to transfer into the ETF space. However, Apkarian believes it will not become the primary method for firms due to the role mutual funds have in retirement savings accounts.
“If there are significant retirement assets or 401(k) retirement assets in the mutual fund, they’re probably not getting converted,” he said. “In most cases, you can’t convert into an ETF within a 401(k).”
ETFs have been gaining an advantage in the industry because they are favored by many advisors because they have tax advantages and are transparent. There has also been a recent shift from the traditional index-based strategies of ETFs to more actively managed versions. ETFs have also become easier for firms to bring to the market because of SEC rule changes adopted a few years ago, according to Cerulli.
The third investment that asset managers are looking at are collective investment trusts (CITs), Apkarian explained. Interest in those funds has been spurred by retirement plan sponsors because they can negotiate lower prices and do not have to deal with SEC scrutiny, he said.
“They can negotiate pricing typically at a lower price point,” Apkarian said.
The flow numbers for ETFs have been increasing while they have been declining for mutual funds. In fact, mutual funds have not enjoyed a positive flow year in about 10 years, Apkarian said. And while the inflows for mutual funds have been declining, performance has been preventing asset declines in the products.
“If [the positive performance] wasn’t occurring the flows out of mutual funds would be significantly worse because a lot of that money went from the active mutual fund to the passive mutual fund,” he said.
Even though other investment products are taking market share away from mutual funds, Apkarian does not believe that mutual funds will go away. They will always remain an important investment vehicle, but their use might evolve going forward, he said.
“I think in their current state, unless something major changes with the way 401(k)s work, they’re going to have their place in retirement portfolios,” he said. “I think a lot of the advantages associated with ETFs and separate accounts are not applicable to retirement money, so that’s where mutual funds will still have their place.”