April 12, 2011
For advisors scouring among thousands of mutual funds, bargains and inefficiencies will be harder to find in coming years. Intense competition among funds for shelf space will not translate to lower fees, and the new class of broad asset allocation funds is unlikely to live up to its marketing promises.
Those were among the surprising forecasts from Geoff Bobroff, with whom I met last week. Bobroff, whose consulting practice is based in Providence, RI, has been an advisor to mutual fund companies for the past 35 years and currently serves on a number of their Boards of Directors.
The biggest trend, according to Bobroff, is one that nearly the entire industry must confront: the secular decline of active large-cap management.
Over the last decade, according to Bobroff, large-cap active management shrank by half, from approximately 40% to 20% of industry assets. Money flowed into index funds, international funds and most recently into fixed income funds. Advisors have been less inclined to buy active large-cap funds, Bobroff said, because they have found it hard to justify layering their own fees on top of expense ratios. Instead, they have chosen to use passive large-cap strategies as a core and build other active strategies around that.
“Until we see a prolonged period of excess returns over the index, active large-cap it is not coming back,” Bobroff said. “And it has to be for at least a couple of years, because otherwise investors just won't buy into it.”
Bobroff said that charging robust fees for large-cap funds is less likely today than it was in the 1990s, when everyone wanted that style. “This is the number one challenge for the industry,” he said.
Let’s look at the nine other trends in the fund industry Bobroff said await advisors.
Trend 2 –The rise of solution-based selling
In the past, fund firms could expect a clear path to success if they gained a spot on the approved list of wirehouses and intermediaries. It’s a different story now, Bobroff said, as brand loyalty plays a much smaller role in advisors’ and investors’ buying decisions.
Solution-based selling has become the dominant theme in fund selection. Bobroff said advisors and clients are building asset allocations and selecting funds based on risk tolerance assessments. and individual fund characteristics now matter a lot more than the fund family.
The fund industry has not fully absorbed this changed dynamic, Bobroff said. Instead, it is still trying to deliver the same product mix that was successful in the past. No longer can a fund family expect to “throw a hundred funds on the wall and expect some portion of them to stick,” he said.
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