Investment Product Development Is Changing
Less than 25% of investment products launched since 2000 managed to attract $1 billion or more during the last decade, according to a report from Casey Quirk & Associates.
The research, titled “New Arrows for the Quiver: Product Development for a New Active and Beta World,” finds that a strong shift towards customization and individualized asset allocation is redefining longstanding product development processes impacting the retirement plan industry. The report argues greater demand for customization “has revealed weaknesses in the current product development strategies used by many asset management firms.”
Specifically, the report finds most existing investment products “rely on increasingly less relevant benchmark-oriented strategies, and during the next five years, retail and institutional investors will withdraw trillions of dollars from these allocations.” Some of the money will be transferred into passively managed indexes and exchange-traded funds, Casey Quirk finds, but institutional investors will also redirect more of the funds “into a variety of ‘new active’ and quantitative products that reflect differentiated, benchmark-agnostic investment propositions.”
The trend is largely a positive for product users, the research finds—especially for large-scale investors that leverage their size to win greater levels of individualized service from investment providers. But at the same time, asset managers are concerned about product development efficiency, flexibility and positioning issues that could damage their own profitability and the performance of investments.
“Both customers and suppliers in the global asset management industry increasingly believe that evolving asset allocation strategies are making existing product sets less relevant,” explains Justin R. White, a partner at Casey Quirk and lead author of the report. He points to “four big factors that have begun to reshape how investors look at their portfolios.”
The first factor is demographics: aging populations in developed economies now require both income and growth potential. At the same time, the historically prolonged low interest rate environment continues to challenge conventional wisdom, especially on the fixed income side of asset allocation efforts. Third, credibility with investors remains badly shaken post 2008, and fourth, regulatory efforts have stepped up around to globe to hold asset managers accountable for results promised or implied.
As explained by White, the resulting approach to asset allocation in this environment has become more closely based on “outcomes and cash flows rather than relative return against a benchmark or peers.”
NEXT: Problems with product development
Given this change in the operating environment, Casey Quirk finds “most senior executives among large asset management firms worldwide believe product development should be a priority—but also rate themselves highly at developing new products.”
Comparing relative growth figures across different asset managers, the report finds successful product development is not always about being first in line. While first-movers can benefit from quickly bringing new and distinct products to market, “smart followers who lag first movers but out-execute with strong differentiation and robust distribution” can do even better. There is also room for success for “strategic product developers” who proactively identify mature categories with strong business potential.
According to Casey Quirk, common mistakes made by asset management firms include “misinterpreting the competitive landscape, often resulting in overestimating demand for a new product idea, launching a strategy that fails to differentiate itself from existing competitive offers at scale, or both.”
Other problems include “poorly designing the product with inappropriate packaging, fees out of line with market expectations, or the inability to use securities or techniques required to achieve the outcome broadcast to investors.”
The research also cites “creating products too complex for most distribution professionals to explain” as a common problem, along with “making professional buyers and individual investors wary that the strategies will work as described.”
NEXT: A secret sauce?
Casey Quirk says a taking a broad industry perspective reveals that creating big winners “might be a function of luck, not skill.”
“An analysis of nearly 15 years of product launch data indicates that the wide majority of products launched since 2000 failed to succeed at scale,” the report explains. “Half of all new investment strategies failed to attract more than $200 million in assets under management, even after 10 years of distribution. Only one of every four investment strategies brought to market since 2000 surpassed $1 billion within 10 years; only 10% did so at the important three-year milestone. Most professional buyers demand to see a three-year performance history.”
While the dual roles of luck and timing remain critical, the report draws some conclusions about what factors make certain products more likely to succeed.
“Investment strategies tied to narrow benchmarks will give way to broader mandates centered on key risk factors and risk/return profiles,” the report concludes. Additionally, investors “will spend more time determining desired outcomes and designing a dynamic asset allocation framework, and less time selecting individual managers.”
“Asset managers must differentiate themselves less on product features and more on the conviction and direct application of their investment strategies,” White says. “Finally, many good ideas fail to reach the marketplace because they never see the light of day, mired in governance processes that become overly bureaucratic or wedded to ‘sacred cows’—in this case, increasingly less relevant views on active asset management (many related to benchmark-oriented investing) that investment professionals are reluctant to discard.”
The full analysis is here.