Three quarters of managers saw ETFs as a big opportunity for their companies moving forward
Three-quarters of managers saw ETFs as a big opportunity for their companies © REUTERS

Asset management companies are increasingly prioritising exchange traded funds, collective investment trusts and separately managed accounts in response to growing demand from clients for cheaper investment strategies, according to a new report.

More than 90 per cent of product executives at 25 different managers surveyed by Cerulli Associates in the third quarter said building out their investment vehicle offerings was at least a moderate priority this year. Three-quarters of them saw ETFs as a big opportunity for their companies. Executives also said they are devoting more resources to developing active ETFs than to smart beta strategies, the report notes.

About three-quarters of the respondents saw big opportunities in institutional separate accounts. While 45 per cent of respondents view CITs as a large opportunity, another 41 per cent saw the products as a medium opportunity, the data shows. And CITs were the second-most-common investment vehicle in survey respondents’ arsenal, with 79 per cent offering them, compared with 89 per cent offering mutual funds and 46 per cent selling ETFs.

While fee compression is largely responsible for the shift of assets and flows to passive and inexpensive active managers, as well as in manager mergers and acquisitions, “vehicle proliferation fits in as a third answer” to the cost pressure, said Brendan Powers, associate director at Cerulli. 

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Indeed, product executives have spoken openly about the desire to match their product offerings to the emerging ways investors and advisers choose to consume them.

“What have our intermediary clients told us? First of all, they don’t want any more mutual funds — from us or from anyone else,” said Dan Beckman, head of US product at Columbia Threadneedle, on an Ignites Exchange webinar last month. The Boston-based firm has consolidated its mutual fund family, while building out its separately managed account capabilities and packaging strategies into CITs, he added.

Expanding the types of investment vehicles available to investors is among the top three product priorities at American Century, and the industry-wide sales data explains why, said Glen Casey, global head of products, on a product strategy panel sponsored by Nicsa, the non-profit investment management trade association, earlier this month.

By the end of September, investors had pulled $316.7bn from long-term open-ended mutual funds since the beginning of January, according to Morningstar Direct data, including $265.8bn from actively managed funds. Going back to the beginning of 2015, open-ended fund sales have been positive for just two of those years, Mr Casey noted.

The Kansas City — based company has been building out its CIT business for some time, starting with its target-date franchise, as a response to demand for lower-cost vehicles, Mr Casey said. And in those products, “we’re seeing much more interest and positive flow in collective investment trusts than in the mutual fund”.

Morningstar data suggests that, industry-wide, CITs are outselling mutual funds in the target-date space. CIT sales grew by 10 per cent in 2019, with $69bn in net inflows. Target-date mutual funds had $59bn of net sales during the same period, or an organic growth rate of 5.4 per cent.

American Century also has gone from “zero presence” in ETFs prior to 2018 to being the first company to launch semitransparent active ETFs earlier this year, Mr Casey noted. The company has launched portfolio-shielding products using the Precidian Investments ActiveShares model as well as a proxy-based suite through a licensing agreement with NYSE.

Nationwide is also very interested in rolling out CITs in 2021, along with building out its existing presence in the ETF market, said Marge Farquharson, senior director and head of the ETF business, at the Nicsa panel. Both projects are part of the company’s efforts to provide strategies in the vehicles that best support key business partners, particularly in the annuities and retirement space. 

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The Columbus, Ohio-based firm was among the first to sign up for a wide array of portfolio-shielding methodologies, from ActiveShares to Eaton Vance’s NextShares exchange traded managed funds. While 2020 has proven to be the year “the ANTs [active nontransparent ETFs] came marching in”, there is still a lot of education that needs to be done on them, and it is not clear to what extent investors will embrace them, she added.

The growing focus on ETFs — even among managers that have long eschewed the product type — is one of the best examples of how cost is driving vehicle choice and product strategy, Cerulli’s Mr Powers said. Firms feel the pressure from distributors moving towards fee-based accounts to offer institutionally priced products, as well as from the business to maintain margins.

“Ultimately it comes down to the other fees — and with ETFs, there’s a lack of record-keeping costs, and other structural cost savings there,” he noted.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignites.com.

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