The shifting playbook for launching new funds
Learning to appeal to the retail segment matters more than before
Ordinarily, Google search volume for the term ‘ETF’ hovers at around 100,000 searches a week. This January, though, it quadrupled. The culprit is, most likely, the launch and buzzy trading of Bitcoin ETFs.
There's a touch of irony in that Vanguard, which staunchly refuses to launch such a product, ranks first for this particular search. But BlackRock and Fidelity have been doing good business, each collecting within a week over a billion dollars in AUM into their Bitcoin tracker.
In tandem, this week BlackRock also announced that it's overhauling its product development function. Historically, BlackRock has managed its ETF products separately from other funds. (It was an iShares legacy issue, where ETFs were mostly index trackers.) But now, with rising demand for blended products and active ETFs, BlackRock wants to have a different process in place for launching new funds.
Change is coming to product launches, much of it in response to the shifts in client behavior. This week, let's see what asset managers need to watch for when launching new funds.
Clearly, something remained of the GameStop era. The self-directed retail investor, empowered by technology, didn't quite go away. This week, an Amundi study showed that, counter to popular perception, digital investing is not just for the young. Among 50-60 year olds, 59% also invest digitally. Furthermore, 55% of investors with more than €150,000 in investable assets expect the proportion invested digitally to increase over the next five years.
For traditional mutual fund players, this is not good news. Many have come to rely on intermediaries to communicate and sell their products. For years, investment companies favored talking to 'professional investors', to the point their marketing materials no longer speak normal English. When FinText analyzed investor conversations in middle-of-the-road investor communities, we found that, on average, fund marketing articles used language that was 60% more complex relative to how investors naturally speak.
At the same time, following the crowds doesn't quite work. A month ago, Roundhill Investments announced shutting down its MEME ETF after investors lost interest. The fund had net assets of just $2.7 million and was down 57% from its debut. And this week, Global X’s announcement that it's shuttering a bunch of products read like a map of yesteryear’s trends: Cannabis, Green buildings, the Metaverse and China.
Just like one can’t get to the moon with a series of small ladders, thematic fads aren't going to deliver on the investment industry's promise that the everyday person can partake in the capital gains of economic growth. However, the noise the ETF industry makes (with its thematic offerings on the one hand and its price competition on the other) is prodding traditional players to innovate. Change may be served to pension funds, but it's prompted through appeal to the retail investor.
BlackRock understands the need to master both sides. Unifying its product development departments aligns with considering both the retail and the professional investors. Other fund houses may have scale, but they struggle with dual appeal.
For example, just this week M&G unveiled a new AI strategy, which it seeded with £20m. As the press release all but admits, the product is geared to appeal to the retail investor and the financial advisors serving them. But when investors seek information on the company’s website, those who self-identify as private investors cannot access the fund's details.
This is typical. The industry has been accustomed to segmenting its audience in very specific bands, of which the retail client is the least important. That may need rethinking. The retail client may not deliver lots of direct AUM, but appealing to it may determine the fate of many new products.
Treasure Corner: Passives as Calm Detectors
Mutual funds originated as a counterpoint to frenzied trading behavior. As buying an ETF is no more difficult than buying individual stocks, are retail investors reverting to gambling behavior, but with ETFs?
In two separate papers, researchers from the Univerity of Louven (Catherine D'Hondt, Younes Elhichou Elmaya and Mikael Petitjean) set out to see what trading behaviour is presented by retail investors that hold some passive ETFs, compared to those who do not.
In the first study, titled Does Holding Passive ETFs Change Retail Investors’ Trading Behavior for the Better?, they find that retail investors trade differently when they hold passive ETFs: They have a higher portfolio size, a lower turnover, and keep their assets for a longer period of time than the control group of retail investors who hold individual stocks only.
Then they turned their attention to how much passives different retail investors hold. The second study, titled Do Stock Retail Investors Show Better Portfolio Performance When They Hold Passive ETFs?, shows that those with a lot of passive ETF holdings trade more passively, while those with a smaller allocation trade as actively as investors who hold individual stocks only.
Also Happening
A UK judge ruled against an FCA manager who wanted to work from home. The manager in question oversees a team of 14 and was part of a team of 650. The FCA maintains that the fast-paced and interpersonal nature of their work is better suited to an office environment. The judge argued that, among others, in-office work is better for "rapid discussion" and "non-verbal communication" than working remotely.
The Nikkei hit a new high this week, and Japanese retail investors promptly responded by selling off the most stocks since 2013. We talked about how the Japanese government is trying hard to get households to invest, but it's finding it hard to change the entrenched aversion to stocks.
Investors are ditching expensive funds in favor of cheaper ones, according to analysis by Morningstar. Even on the cheap end, the most expensive funds are also falling out of favor, highlighting just how cut-throat the competition is becoming.
Exxon Mobil is suing activists investors to prevent a climate proposal from being voted on during its upcoming shareholder meeting. Last week we talked about the onset of 'resolution fatigue', but that mostly covered the fatigue of large investment managers. We said:
"(Active investors') real beef is not with changing the companies. Rather, it’s struggling to change how asset managers think about the tool of shareholder resolutions...Companies know this really isn’t about them"
Exxon could have just let it fail the vote but it wanted to make a statement of its own. It is the only one of the five Western oil majors which does not have such targets. Its suit isn't so much to dismiss the proposal, but to make a case against shareholder activism.