Tide Shifts for Open-End Mutual Fund Market

For the first time since their creation, open-end mutual fund launches were eclipsed by the combined introductions of ETFs, closed-end funds, and variable annuities in 2007.

A report from Cerulli Associates said the cumulative impact of these and other alternative vehicles, including structured products, funds of funds, and collective and commingled trusts, poses a significant threat to the open-end mutual fund market. Cerulli contends that 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.

In fact, assets in equity mutual funds that do not fit into the nine style boxes have more than tripled since 2002, according to a Cerulli release. The market share of funds that do not fit into style boxes has increased from 20.6% in 2000 to 27.2% in 2007.

The increased availability of alternative strategies is challenging product marketers as they seek to position their funds amid evolving portfolio construction. 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 evolution in thinking—coupled with Baby Boomers’ changing needs as they shift into retirement mode—is influencing the portfolio construction of both new and established products, Cerulli notes.

The changes are also influencing which products and strategies distributors use to meet their clients’ needs, and ultimately which products gather and retain assets, Cerulli said. The report says changes to the underlying construction of products is shaping how advisers and platforms construct client portfolios, as well as the demand for certain products and strategies.

Contact Cerulli Associates for more information about the Cerulli report: “Product Development in an Evolving Portfolio Construction Environment,” at 617.437.0084 or CAmarketing@cerulli.com.