Retail fund sales are dead, the future lies in institutional business

What most of us have learned about long-term capital market risks and rewards has finally proven not to be valid anymore, says Philip Kalus of Accelerando Associates.

This, combined with increasingly more complex products, higher fees, poor performance numbers and also with the increasing equation of the terms ‘banksters’ with fund managers, all make retail investors step back from investment funds more and more.

The investment fund industry now faces a crucial turning point in retail funds sales.

It has been an odd capital market for quite a while now.

Equity markets have been mainly driven not by fundamentals, but by a handful of politicians saying something (or saying nothing) about possible actions on Europe’s debt crisis.

Traditional bond markets have ‘reversed’, and now provide no returns and substantial risk.

German investors have suffered additional shocks with the blow-up of the ‘offene Immobilienfonds’ (open-ended real estate funds), which were once considered safe-haven investments.

Looking at global fund flow data, and in particular at European data, 2011 and 2012 provide strong evidence that broad fund distribution has reached a turning point.

Fund flows – positive or negative – have been dominated by few strong players, but not by retail markets.

When we speak to family offices and private banking units internationally, we identify one central point with many of these fund buyers: “Our investment fund business is pretty dead now. People are fed up with high volatilities, poor investment performance and high fees.”

We understand that these points are ranked correctly from a retail investor point of view.

Fund selectors dealing with retail investors also face an increasingly sharp loss of faith in financial institutions, given the seemingly endless chain of scandals produced from them.

Sure, these scandals do not relate to the investment fund industry directly, but they certainly affect retail fund buyer emotions and behaviour.

The term ‘banksters’ is now well established, and many retail investors do not distinguish between a ‘bankster’ and a fund manager.

In our view, this is a serious issue.

The investment fund industry has failed to distinguish itself culturally from moral hazard investment banks.

Actually, just the opposite has happened: The fund industry has adorned itself too long with investment bank culture and investment bank-background CVs.

It is also important to bear in mind that many fund management firms are owned by banks – often being investment banks or banks aiming to emulate them.

Are boutique fund managers the solution?

Yes, partly. We see more and more institutional investors implementing boutique funds and mandates. However, at the same time, regulatory and compliance pressure is increasing, particularly for wholesalers and private banks, which makes them more and more shun boutique funds in retail distribution, regardless of whether they are are happy about it or not.

 

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