Recent market developments have shown 3 main impacts on funds buyers community and more broadly on the fund selection market.
Standardisation of due diligence
The Association of Professional Fund Investors (APFI) has reviewed dozens of its members’ due diligence questionnaires and discovered around 90% of questions are common. Leading distributors such as Mediolanum, Santander or Pictet have teamed-up with global asset managers such as Columbia Threadneedle, Franklin Templeton or Schroders to ease the process and save time on one of the most burdensome aspects of fund selection.
To address this issue, a digital interface for due diligence information called DOOR has been created to cut down the paper trail while also providing fund selectors with more secured, timely and up-to-date information. DOOR will be free of charge for fund investors.
DOOR will maintain up to date responses to the standard questionnaire thereby removing the need for each fund investor to send common data requests. It allows fund investors to separately ask additional questions specific to their needs and spend time on data analysis rather than data collection.
Other benefits include:
- maintaining and advancing industry best practice standards (overseen by APFI)
- quick and automated uploads of fund information by asset managers
- providing fund investors with information on all available fund ranges
- improving fund investors’ user experience in selecting or monitoring fund holdings
- speeding up communication of changes to fund information between AMs and fund investors
As it becomes easier to access fund information digitally, fund selectors are finding it less necessary to meet with salespeople. Salespeople must become “much more technical” and have a "deeper product knowledge" according to a partner of Accelerando Associates.
Influence of robo advisors: greater account of transparency over costs and a new market segment for asset managers
With the help of upgraded financial engines, distribution network gatekeepers as well as advisers are able to perform sounder fund analysis.
This also includes robo advisors which are a kind of funds selectors. Historically robo advisors were focused on costs in their selection process of passive funds which represent the bulk of their underlying funds offering. Such digital platforms also often include estimates of turnover and trading expenses which poses a challenge to funds manufacturers with funds that are not able to easily quantify this information.
It is worth noting that robo advisors are now expanding their investment universe towards active management as well as smart beta.
This trend towards goal-based personalised investing will push asset managers to develop funds more suited to this process. As an illustration, BlackRock and Goldman Sachs AM tied-up with the largest independent robo advisor Betterment ($10Bn AuM for 270,000 customers) to add respectively an income portfolio and smart beta options.
The smart-beta portfolio option managed by GSAM will give users exposure to riskier investment areas, such as emerging markets, REITS, and US small-capitalization companies. It is designed to deliver higher returns than conventional market-weighted index products.
Meanwhile, the income-based portfolio option managed by BlackRock will target risk-averse investors seeking higher returns. It is composed of ETFs distributed across several risk bands, which invest exclusively in US bonds and international bonds denominated in US dollars.
Betterment stated that it decided to import existing products from third parties to deliver new strategies to its customers as rapidly as possible like an open architecture distribution network would do…
Digital platforms for selecting funds: ‘where Morningstar meets TripAdvisor’
SharingAlpha is an online rating platform which allows funds buyers to publicly share information about the funds they have invested in (see the video hereunder). It could have an influence on the type of products asset managers offer.
Indeed, SharingAlpha rates funds based on the average rating provided by fund selectors worldwide. Indeed, more than 5,000 ratings have been gathered in the platform from 1,000+ fund professionals from 52 different countries. Access to the platform and the engagement with the process by which fund selections are registered is free to use for fund selectors.
Products from firms including Comgest, HSBC or Wellington were recently given top ratings by SharingAlpha users and this information was published in the professional press (such as Investment Europe, see 'Read More' section).
Regarding fund buyers ranking the top 3 firms are Jupiter, Schroders and Invesco (Amundi is not quoted).
The ability to access and analyse much more data has also led fund selectors to choose new metrics for rating funds. Some are starting to move away from rating funds on past performance and instead examine other forward-looking data such as SharingAlpha’s fund selectors ranking methodology which aims to assess fund selectors talent in predicting fund performance.
This is based on a tool offered to investment advisors for building a proven track record in fund selectionas well as asset allocation capabilities (through virtual fund of funds managed by investment advisors which enables the platform to rank them). Investment advisors are ranked according to their success in rating funds. Users identities are kept secret by default: any decision to share the generated track record is up to the selectors themselves.
Future will tell if, as the FinTech founder thinks, investors will come to digital funds rating platforms such as SharingAlpha to find fund selectors and investment advisers who will then be in a position to illustrate their long term track records.
Author: Eddy Arnaud
