UK asset managers shun traditional asset classes and line-up alternatives, multi-asset and ESG fund launches for 2020
The UK’s largest investment managers are moving away from traditional asset classes when prioritising new product launches for 2020, according to the latest Product Trends Survey from Alpha FMC, the asset and wealth management consultancy.
60 per cent of the asset managers surveyed cited alternatives as one of the top three priorities for product launches in 2020, followed by multi-asset (53 per cent) and responsible investment products (40 per cent).
Multi asset demand remains high but institutional demand for alternatives is increasing
The growing popularity of multi-asset funds identified in Alpha’s 2018 report has continued. Multi-asset funds accounted for 37 per cent of net retail sales in the UK in the 12 months to February 2020 and 53 per cent of net retail sales in February, according to the Investment Association, and this trend is expected to continue as investors seek diversification to help mitigate market volatility.
However, asset managers are now also seeing increased demand across most alternative asset classes, with a particular focus on infrastructure, alternative credit, and traditional private equity, largely driven by institutional investors and pension funds. 60 per cent of respondents listed one or more alternative asset class in their top 3 priorities for fund launches in 2020. This 60:40 split indicates that asset managers may be moving further towards either end of a market spectrum, with specialists at one end and global distribution giants with the scale to offer all asset-classes at the other.
However, competing in the alternatives space will come with challenges. Alternative asset classes are by nature more challenging products to develop and deliver operationally, impacting the time to market. Two-thirds (67 per cent) of respondents with an alternatives offering said they face challenges in structuring new private asset products, and just over half (53 per cent) agreed that the speed of their private assets product development was a barrier to entry.
Joe Docker, executive director at Alpha FMC, says: “2020 will be a challenging year for asset management product teams. Given the market volatility as a result of the global pandemic, firms are likely to be reconsidering investment in product launches. However, many of the asset classes identified in our study as priority for 2020 will likely be in increased demand in a volatile market. For example, demand for multi-asset products is increasing in the retail space as their diversification offers reduced risk whilst retaining growth potential. Similarly, pension funds are increasingly turning to alternatives as a source of long-term income, and ESG remains a hot topic with some links to long term outperformance. There may be opportunities if firms can move quickly enough.”
Lack of resource and expertise stymie product expansion as new funds take an average of eight months from conception to launch
Client demand is the most commonly cited factor given by all asset managers give when listing their top three considerations when launching a fund, followed by their existing investment capabilities (76 per cent) and alignment to company strategy (65 per cent). However, asset managers face significant obstacles to scale their existing product range. On average, fund launches take eight months from conception to launch date.
The most common issue faced in launching new products is sufficient resourcing (41 per cent), both within and across teams. This issue is likely only to be exacerbated for alternatives funds where there are fewer expert staff available. With 46 per cent of respondents expecting to acquire or substantially develop their alternatives offering, the competition for talent will become more intense.
Other significant obstacles include poor communication between teams (24 per cent) and a small but significant number of asset managers (6 per cent) cite reliance on manual rather than automated processes as an issue. Asset managers face additional challenges regarding how they can improve processes and technology to get to market faster; 88 per cent of respondents have no technology investment roadmap for their product teams.
Demand growing for thematic ESG products
Client demand for responsible investing remains high, as respondents identified strong growth in demand for both ESG integration and specialist products. 59 per cent have seen a substantial increase in client demand for specialist ESG/ Responsible Investing products, and 76 per cent have seen substantial increase in demand for ESG integration across their whole product range.
However, asset managers struggle with ambiguity around ESG, with 88 per cent of respondents moderately or strongly supporting the introduction of an industry standard taxonomy, allowing for easier comparison of products and reducing the scope for "green-washing". The uncertainty surrounding future reporting requirements is clear; asked when they might need to disclose key data points as part of product descriptions, responses varied from “within 12 months” to “more than 10 years”. The recent news that European supervisory authorities will require fund firms to reveal more information regarding the sustainability of their investments and products will place further pressure on the industry.
Tim Quaye, senior manager at Alpha FMC, adds: “Leaving aside for a moment the significant challenges facing the industry as a result of Covid-19, asset managers will have to balance multiple priorities including revamping existing product ranges and launching increasingly esoteric products to meet client demand. All of this will need to be achieved against a backdrop of ever strengthening competition, continued regulatory pressure and increasing scrutiny over Environmental, Social and Governance considerations.
“One of the primary barriers to scaling product ranges is simply the time it takes to get to market. With fund launches taking an average of eight months from conception to launch date, there is a risk that client demand may have evolved or been satisfied by the fastest movers before the average participant is able to launch. As managers diversify beyond their core investment capabilities, this challenge will be exacerbated.
“While all asset managers we surveyed are considering building new product capabilities in-house, around 65 per cent also utilise acquisition. Acquisition of external investment teams will become increasingly common as managers exhaust options for launches aligned to their core investment capabilities and seek to expand into more niche assets. Outright acquisition of teams may be the most sure-fire means of delivering an alternatives capability, but acquiring at an attractive price – and achieving post-acquisition synergies if it is a new capability – will be a challenge.”