ETFs, SMAs, and Alternatives Accelerate – Takeaways from the IMEA Product Council

Wentworth Financial Communications attended the 2023 IMEA Product Council in New York along with product development leaders from across the asset management industry.

Here are some key takeaways from the Product Council’s discussion of how trends in asset flows, portfolio construction, and wealth management are shaping asset managers’ product lineups.

As content strategy and content marketing specialists for the asset management industry, it was particularly valuable for us to attend this event. We often get brought in to create thought leadership and other types of content marketing to support these products after they launch, so it was helpful to hear about the myriad considerations that shape asset managers’ decisions related to their asset class and vehicle lineups.

Hot Product Strategies

Shifts in market conditions and advisor and investor preferences are forcing asset managers to evaluate their product lineups and determine which vehicles are best suited to deliver the outcomes investors seek. Institutional Shareholder Services (ISS) Market Intelligence shared data about how mutual funds are losing market share to exchange-traded funds (ETFs), collective investment trusts (CITs), separately managed accounts (SMAs), and interval funds and other alternative structures. The panel then shared best practices for scaling, marketing, and servicing product lineups for each of these vehicles.

Highlights:

• ETFs: Despite the seeming ubiquity of ETFs, there is still an education barrier that asset managers need to help advisors overcome to spur further ETF adoption. This is especially true for ETFs in niche strategies or asset classes—areas that also provide the most white space for product innovation. In addition to building a team of ETF product specialists, asset managers need to develop ETF content that allows advisors to understand the use cases for a specific asset class or strategy; ideally, this content is approved for public distribution, so advisors can in turn use it to engage with their clients.
• CITs: The size of the CIT market is often underappreciated by asset managers. The panel presented data showing that a higher percentage of 401(k) lineups include CITs than mutual funds. 403(b) plans currently are prohibited from investing in CITs, but a 2023 Congressional bill proposes to change that, creating the opportunity for expansive growth of the CIT market.
• Interval funds: Vehicles such as interval funds, tender offers, and business development companies (BDCs) are playing a leading role in the democratization or “retail-ization” of alternatives. Deciding whether to buy or build these capabilities is paramount as asset managers look to expand their alternatives lineups and reach non-institutional investors. In addition to educating advisors and investors about the structural and liquidity nuances of each vehicle type, asset managers need to focus on explaining how investors should reallocate from traditional strategies to fund alternative allocations in their portfolios.
• SMAs: Delivering enhanced opportunities for personalization and tax-efficiency requires supporting SMAs businesses with product specialists and technology. Asset managers need to focus on creating a unified experience for advisors and investors, regardless of whether a strategy is delivered via SMA, mutual fund, or ETF; achieving this can be challenging if each of these businesses operates as a separate business unit.

ETFs Everywhere

The proliferation of ETFs is occurring on multiple fronts. In addition to the well-established popularity of equity index strategies, active ETFs—in both equity and fixed income—continue to gain momentum. The Product Council explored the considerations asset managers face when looking to break into the ETF business or expand their current lineups.

Highlights:

• Product development teams must determine the best path to expand their ETF lineups, including conversions, cloning, and launching new strategies. Each approach can be appropriate and viable—as long as the decision is driven by which approach best solves for investors’ needs. Conversions can be an appealing route for quickly achieving scale, but this approach entails a host of logistical, economic, and marketing considerations that asset managers must sort through.
• The first quarter of 2023 was the first three-month period when flows into fixed income ETFs outpaced flows into equity ETFs. This was primarily driven by the surging demand for ultrashort bond ETFs in the current interest rate environment and a spate of mutual-to-ETF conversions by Dimensional Fund Advisors and other managers. Active fixed income ETFs are gaining popularity as well because they provide ways for investors to access portions of the fixed income market that are extremely hard to index.
• Flows into semitransparent active ETFs have been disappointingly slow. Wirehouse platforms and other gatekeepers are struggling to get comfortable with the products, many of which lack three-year track records. But it’s important to remember that we’re still in the early innings for semitransparent ETFs, and large growth potential remains.

The Continuing Evolution of Alternatives

Asset managers are rethinking their existing processes and team structures to meet growing demand for alternative investments and create a more delightful client experience. Panelists discussed the key issues related to meeting growing demand for alternative investments, including the need for better education, more streamlined subscription processes, and greater collaboration across internal functions such as sales, marketing, client service, and data and analytics.

Highlights:

• Growth in demand for alternative investments has created a robust environment for new product innovation. In the current rising rate environment, many advisors are re-underwriting portfolios and looking for true diversifiers to existing portfolio exposure. Interesting opportunities also are arising from banks stepping back from certain areas like private credit, leading to further product innovation among asset managers.
• There is a critical need for education and information sharing in alternatives. Education is needed not only from a strategy and sub-strategy perspective to ensure advisors understand the nuances of a particular investment opportunity, but also on the structure of the products to ensure advisors and end investors have a clear understanding of the related client experience.
• Asset managers are keenly focused on stitching together an end-to-end client experience that is more delightful in the alternative investments space, which will take an enormous amount of collaboration across marketing, sales, data and analytics, product, and client services teams and a well-defined, client-centric vision.
• Simplifying the subscription process for alternative investments and making it more accessible and easier to navigate are key areas of focus. Technology-enabled solutions will be critical to achieving a more efficient, simplified approach. Improvements can be made to shorten subscription documents, make them easier to fill out, and provide any required context and education as an integrated part of the subscription process.
• In addition to point-of-sale challenges, asset managers are also focused on optimizing the post-sale client experience and making it more customizable. Managers are focused on questions such as: How often do clients need information? What sort of information do they demand? And how can managers create a feedback mechanism to identify clients’ needs and issues and respond to them proactively?

Distribution & Product Partnership in Innovation & Managing the Product Lifecycle

As competition increases and organic growth becomes more challenging, there will be less room for error in product innovation and product management more generally. This session brought distribution and product leaders together to candidly discuss how their teams can work closely to provide innovative product offerings and lead to successful client experiences.

Highlights:

• Organic growth is projected to decline significantly throughout the next decade while competition is expected to intensify. This means asset managers will need to work harder to scale new products, and efficient fundraising will be critical. Winning managers will evolve their product development functions and mindsets to both launch and scale new products as well as rationalize old products more efficiently than other firms.
• Product development has become increasingly complex relative to previous decades because of the range of strategies and structures available. Today, there is also a greater need to justify the product and ensure the operational support is present—including the right team members and specialists—to successfully roll out a new product.
• To create an effective feedback loop that takes information learned from sales and other client-facing roles to influence the product development process, many managers have found success by emphasizing targeted engagements with specific advisors and centers of influence. Other areas of success include establishing advisory councils featuring wholesalers and marketing and product team members, as well as directly soliciting feedback from the sales team on ideas for product improvements.
• Bringing distribution team members into the product development process earlier is another way to improve the design of new products. The distribution side can provide valuable perspective about what clients truly need, areas that may be challenging, and the sorts of education and information that should be developed to make the launch and fundraising process more efficient.
• While much of the excitement and attention around innovation today is focused on new products, strategies, and capabilities, asset managers should also focus on innovation within the mutual fund structure given the level of assets in mutual funds.

Highlights provided in partnership with Investment Management Education Alliance (IMEA). Access more spring summit highlights here.

About the Author Scott Wentworth, CEO at Wentworth Financial Communications. Scott leads a team of writers and editors at Wentworth to help firms across the financial services industry build their brands and articulate their expertise by creating investment-grade content.