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Strategic Insight

Global Fund DistributionBest Practices, Key Trends, and Operational Models to Grow Sales Worldwide

Global Fund Distribution

STRATEGIC INSIGHT 1


Best Practices, Key Trends, and Opportunities to Grow Sales Worldwide

Strategic Insight*

Daniel Enskat Head of Global Consulting, Managing Director

+1 (212) 217-6859 [email protected]

Jag Alexeyev

Head of Global Research, Senior Managing Director +1 (212) 944-4456 [email protected]

© Copyright 2008 * Refers to Strategic Insight Mutual Fund Research and Consulting Electronic Products Inc. and its wholly-owned subsidiary, Strategic Insight Mutual Fund Research and Consulting LLC, both defined as Strategic Insight.


STRATEGIC INSIGHT 2

Reproduction in whole or in part is prohibited except by permission. © Copyright 2008 Strategic Insight Mutual Fund Research and Consulting Electronic Products Inc., and when referenced or sourced Lipper Inc., and Morningstar Inc., All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) may not copied or redistributed for any purpose, (c) are provided solely for information purposes, and (d) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. Reproduction in whole or in part prohibited except by permission. Any data or commentary in this report is for the internal use of client management companies only and is not to be disseminated to the general public and sales intermediaries in the form of regulatory or other reports, promotional material, or advertising without the prior written consent of Strategic Insight. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report.


STRATEGIC INSIGHT 3

KEY MANAGEMENT THEMES

GLOBAL FORCES CHANGING THE MUTUAL FUND INDUSTRY Globalization: The new economic world order of fund distribution. Accidents Happen: Short-term threats and long-term opportunities. Crisis Mode: Action plan for customer retention and growth in times of severe investor anxiety. Shifting Tectonic Plates: From pariah to growth engine – emerging market growth vs. mature market decline (more east-east transactions, less Europe and the US). Watch the Left Field: A more connected and dynamic global fund world requires a broader list of competitors. Fund Flow Complexities: On- and offshore flows are more complicated and dynamic than ever. Traditional vs. Alternative: A broader definition of asset management. Who will be the winners?

TRENDS IMPACTING DISTRIBUTORS AROUND THE WORLD

Distribution Opportunity Matrix (DO Matrix): How distributors approach fund selection and partnerships with asset managers. Of Apples and Oranges: Misaligned expectations and preconceived notions between distributors, asset managers, and clients. Moving Beyond Select Lists: “Flight to quality and simplicity” creates new forms of collaboration; how to go beyond the “official selection route” to grow sales. Changes in the Operational Setup of FSUs: Fund selection for Asia and emerging markets brings significant operational challenges. Distributor Case Studies: Similarities and differences between global and regional distribution.

BEST PRACTICES FOR ASSET MANAGERS TO GROW SALES

The Few, The New, The Proud: Product innovation and management in a global fund world (back to basics asset allocation, themes, concentration of global flows and specific local demands); strategic versus tactical product lines. Long-Distance Relationships: Wholesale distribution through global distributors versus the need to be fully operational on the ground. More than Meets the Eye: Smaller markets often provide greater opportunities than larger markets to build sticky, sustainable long-term relationships. Power to the CDAs: Creating a senior team of “creative data analysts” with strategic and tactical decision making power to leverage distribution. Breeding New Sales People: Setting up the operational structure and incentives to create a new, “selfless”, breed of sales for long-term growth. New Era of Advice, Client Service and Marketing: Beyond a 5-Star rating, the service proposition is the differentiator from “select list” to “priority product”. Lost in Translation: Global/emerging market opportunities require local knowledge, language skills, and creative multi-cultural asset managers.


STRATEGIC INSIGHT 4

Table of Contents

Introduction _____________________________________________________________________ 7

Executive Summary _____________________________________________________ 9

1. GLOBAL FORCES CHANGING THE FUND INDUSTRY__________________ 15 Realignment of Global Fund Flows and Industry Focus __________________________________ 16 Short-Term Threats Can Be Long-Term Opportunities___________________________________ 21 Turning Survival into Growth Strategies: Action Plan for Customer Retention and Growth in Times of Extreme Investor Anxiety _______________________________________________________ 24 Focus on Retention and Broadening of Distribution Channels _____________________________ 27 New Emerging Market and Thematic Product Joint Ventures______________________________ 29 Bridging the Gap between Emerging and Developed Markets _____________________________ 32 The Promise of China – Then, Now, and Tomorrow_____________________________________ 35 Watch the Left Field: Changes in Leadership __________________________________________ 39 Sorting Through Fund Flow Complexities ____________________________________________ 43 Local and Offshore in Perspective: What You Can’t See Can Hurt You______________________ 45 Emerging Markets: Economic Stabilizer and Strong Flows _______________________________ 49 High Net Worth Investors: Adapting to Regional Differences _____________________________ 52 Towards a Broader Definition of Asset Management Away From “Traditional” and “Alternative” 53

2. TRENDS IMPACTING DISTRIBUTORS AROUND THE WORLD __________ 57 Selling Ideas versus Asset Allocation and Advice_______________________________________ 58 Of Apples and Oranges: Aligning Expectations for Distributors, Asset Managers and Investors___ 65 A Growing Fiduciary Role for Distributors, Flow Concentration, and Risk Management Focus ___ 67 Moving beyond Select Lists To Grow Sales ___________________________________________ 71 Key Changes within Distribution Organizations and FSUs, and Implications for Asset Managers _ 74 Changes in the Operational Setup of Fund Selection Units ________________________________ 77 Global Fund Distributors – Case Study Citibank: _______________________________________ 82 Regional Fund Distributors – Case Study Hang Seng: ___________________________________ 86 The Demise and Renewal of Absolute Return__________________________________________ 89

3. BEST PRACTICES FOR ASSET MANAGERS TO GROW SALES ___________ 93 Aligning Strategic and Tactical Product Lines for Global Success __________________________ 95 Examples of Blockbuster Products Around the World ___________________________________ 99 Operational Aspects of Global Product Development and Distribution _____________________ 114 Operational Models to Build Global Distribution:______________________________________ 116 Enhancing Distribution with a Creative Data Analyst Team and a New “Breed” of Sales _______ 122 Performance and Ratings as Determinants of Distribution Success ________________________ 125 Lost in Translation: Overcoming Cultural and Political issues:____________________________ 131 Distribution Channel Sales Observations Around the World – Similarities and Differences _____ 133 Closing Thoughts: The Past, Present and Future of Fund Distribution ______________________ 141 Strategic Insight Resources: Ongoing Reporting Of Key Trends __________________________ 144


STRATEGIC INSIGHT 5

Presentations and Tables 1 - Global Mutual Fund Flows by Region__________________________________________________ 18 2 - Global Mutual Fund Assets, Market Share by Investors of Origin ____________________________ 19 3 - Emerging Market and Thematic Product Joint Ventures____________________________________ 30 4 - Emerging Markets: Top Selling New Products in Japan ____________________________________ 33 5 - China: Largest 10 Funds Subscriptions and Redemptions __________________________________ 36 6 - Top US Long-Term Fund Managers – Historical Comparisons ______________________________ 40 7 - Fast Growing Fund Managers Across Europe, Offshore, Asia _______________________________ 42 8 - Selected Bestselling Offshore Funds in Asia Round Trip ___________________________________ 47 9 - Bestselling Offshore Funds RFS in SG, HK, TW __________________________________________ 48 10 - Highest Cash Flow Emerging Market Funds____________________________________________ 51 11 - Top-selling Traditional Long-Only and ETF Funds ______________________________________ 55 12 - Global Distribution Opportunity Matrix (DO Matrix)_____________________________________ 58 13 –HNW Investor Service Attitudes by Region _____________________________________________ 63 14 - Concentration of Fund Flows for Top Managers ________________________________________ 68 15 - Organic Growth Rates of Large Fund Managers – Asia/Europe ____________________________ 69 16 - Organic Growth Rates of Large Fund Managers – US ____________________________________ 70 17 - Case Study Citibank: Global Select Lists and Partners ____________________________________ 84 18 - Case Study Hang Seng: Regional Select Lists ___________________________________________ 87 19 - Absolute Return Funds in Europe – Quo Vadis? _________________________________________ 90 20 - The Case of JP Morgan Highbridge __________________________________________________ 91 21 - Selected Highest Cash Flow Absolute Return Funds ______________________________________ 92 22 - New Fund Launches by Year of Introduction – US, Europe, and Asia ________________________ 96 23 - Selected Blockbuster Products _______________________________________________________ 99 24 – Best-Selling Thematic, Allocation, ETF, and Alternative Funds – 2008 Flows ________________ 103 25 – Best-Selling Thematic, Allocation, ETF, and Alternative Funds – 2007Flows _________________ 104 26 – Best-Selling Thematic, Allocation, ETF, and Alternative Funds - 2006 Flows_________________ 105 27 – Best-Selling Thematic, Allocation, ETF, and Alternative Funds – 2005 Flows ________________ 106 28 - Active vs ETF and Index Funds -Europe Mutual Fund Quarterly Flows _____________________ 110 29 - ETF Funds in the US, Europe and Asia _______________________________________________ 112 30 - Operational Models for Global Distribution ___________________________________________ 114 31 - Asset Management Approaches to Global Distribution___________________________________ 117 32 - Creative Data Analysts (CDA)______________________________________________________ 122 33 - UK Net Flows by Morningstar Rating ________________________________________________ 126 34 - UK Net Flows by Lipper Leader Consistent Return Score_________________________________ 126 35 - Performance and Manager Selection – Case Study 1 ____________________________________ 128 36 - Performance and Manager Selection – Case Study 2 ____________________________________ 129 37 – US Fund Sales by Distribution Channel Among Managers Focusing on Intermediary Distribution 134 38 - Japan Retail Gross Sales By Distribution Channel ______________________________________ 135 39 - Korea Mutual Fund Industry _______________________________________________________ 136 40 - Distributors of Funds in Korea, Q2’08 _______________________________________________ 137 41 - Distribution Channels for Selected Foreign Managers in Korea ___________________________ 138 42 - UK Retail Gross Sales By Distribution Channel ________________________________________ 139 43 - Germany Mutual Fund Industry Distribution Channel ___________________________________ 140


Introduction

As part of our global mutual fund research and project work with clients over the last two

years we spent most of our time traveling the world – mostly to Asia, the Middle East and

Latin America, as compared to more Europe and the US in the prior decade. During this

time we were fortunate enough to present and participate on public and private industry

panels with experts ranging from public policy, investment banking, consultants, and

institutional research and academia. We were also able to work closely with a few dozen

CEOs on consulting projects and strategic product reviews to implement their offshore

distribution efforts.

Strategic Insight never could have put together this distribution analysis without the

invaluable assistance from many of our key clients around the world. Dozens of CEOs,

Heads of Sales, Product Development and Strategy were kind enough to spend time with

us in person or on conference calls to provide details and feedback on their firms, strategy

and distribution efforts. In addition, a few long-term key clients reviewed the report

during its creation and provided us with their thoughts, editorial comments and best

practice anecdotes. We are deeply grateful for their time and insights, as the details on

their respective sales and distribution approaches combined with our data and analysis

form the core of this study.

During these challenging times, we return to our past research which followed other

traumatic events to put recent developments in perspective and to offer ongoing

assistance to our clients. More than ever before, Strategic Insight focuses on providing

essential data, business analytics, and in person presentations and meetings to our clients

to help them overcome short-term challenges and capitalize on long-term opportunities.

Our travel schedule through the end of 2008 will be intense, as we are asked to present to

industry associations, regulators and company boards across the US, Asia, Europe and

the Middle East. At the same time it will allow us to meet with many of you to assist

STRATEGIC INSIGHT 8


with advice and perspective. For those that we cannot touch base with in person, we will

conduct a number of webex presentations and conference calls to allow for discussion of

your specific distribution needs.

Our research library with almost 700 studies covers over twenty years of data analytics

and qualitative research on the core issues fund managers and distributors are facing on

an ongoing basis. Throughout this report, footnotes will point to in-depth studies we

have written in the past that provide additional details, data and perspective. For

example, just last week both Strategic Insight’s president and director of research

published reports on customer retention and mutual fund strategies for uncertain times to

provide clients perspective and reassurance in the current global financial crisis.

All the tables and data provided in this report were generated using our proprietary global

database Simfund Global, which integrates key data points including assets, flows,

performance, ratings/rankings, fees and portfolio holdings from Morningstar, Lipper,

local data providers, and Strategic Insight, updated through July 2008. Clients of the

distribution report will get access to a dedicated “Global Mutual Fund Distribution

Landscape” website for one year (launched in late 2008), with key data tables, graphs,

and select lists updated on a quarterly basis to keep the data behind the analysis current

and to allow for thought exchange and ongoing feedback. We are currently reviewing

September 2008 data and the strong outflows for the month and will update the quarterly

data on the site in the coming weeks.

At the end of this report, following the closing thoughts, we offer clients Strategic

Insight’s ongoing reporting of key trends, product, distribution, and overall industry

research, and annual surveys, for their ongoing distribution research needs.

New York, October 2008

Daniel Enskat Jag Alexeyev Head of Global Consulting Head of Global Research Managing Director Senior Managing Director

STRATEGIC INSIGHT 9


Executive Summary

We have divided this report on global fund distribution into three broad chapters, with

each chapter organized into five to six themes discussed in detail:

1. Global Forces Changing the Mutual Fund Industry

2. Trends Impacting Distributors Around the World

3. Best Practices for Asset Managers to Grow Global Sales.

The global distribution landscape currently is being reshaped by several fundamental

factors – the impact of which will be felt for years to come and will provide both

challenges and opportunities for asset managers and client facing firms.

The inherent benefits of mutual funds – easy access, transparency, liquidity,

conservative pricing methodologies, sound regulatory framework, diversification,

and compatibility with long-term investing – will become even greater strategic

advantages in the wake of the current global financial crisis. The largest financial

shock since the Great Depression has governments, financial institutions and

investors around the world in survival mode, with extreme market volatility and

trillions of retirement assets wiped out. Investors that redeemed during the

downturn will miss the market rebound, amplifying their losses. Those that

continued with a dollar cost averaging approach through the crisis, however,

reduced their relative losses and stand to gain from a potential rebound.

Similarly, while the industry is facing strong redemptions, lower sales, and a

flight to safety in the near-term, the crisis is a major opportunity for the many

benefits of mutual funds – only highlighted when compared with derivatives

based structured products, hedge funds, and direct stock investing. Ultimately,

those companies able and courageous enough to plan for growth now will gain

significant market share in the future.

STRATEGIC INSIGHT 10


The sustained growth of funds in Asia even during the current crisis confirms the

powerful shift of investor demand, flows, and the center of asset management

focus, which, more than anything else, will influence distribution opportunities in

coming years. Fund inflows in Asia through August stood at $60 billion despite

sharp NAV declines. In contrast, long-term funds across Europe gave back $360

billion in net redemptions (even more considering strong inflows to ETFs). While

US funds have also continued to benefit from net inflows in 2008, the center of

asset management growth opportunities is shifting, with Asia as a likely long-term

beneficiary.

This growth of emerging regions and corresponding business complexity is

encouraging the decentralization of distribution efforts. Global fund selectors,

while still leaning on centralized processes, are empowering local units in the

growth centers of Asia, Latin America, and the Middle East. The power of some

centralized fund selection units (FSUs) is also waning largely due to their inability

to cater to the specific needs of the local markets. This in turn is encouraging asset

managers to go beyond the FSU and develop relationships with local sales and

product teams. Meanwhile, the question of open, guided or closed product

platform architecture continues to be a central question for distributors. The

question is multi-faceted and distributors consider costs, marketing/sales

efficiencies, economics, competitiveness of product menu and ability to maintain

a sufficient level of oversight. Furthermore, as distributor product menus evolve,

it is clear that simply getting on select lists is thus not enough – value-added

services and influencing key advisors are needed to get flows.

Diverging needs for theme/transaction-based products versus asset allocation/fee-

based solutions are also strongly influencing distribution structures and priorities.

The balance between these two needs, along with product design, support, and

fund selection criteria also vary by market maturity. Addressing the needs of

multiple markets at different stages of their evolution has become remarkably

complex, impacting both asset managers and distributors.



To cater to the different needs and stages of distributors worldwide (theme/

transaction versus allocation/ fee-based), asset managers are paying more

attention to both “strategic” and “tactical” product lines. Distributors note a

desire for simple products with strong conviction of investment approach and see

less room for benchmark products, yet more use of exchange-traded funds (ETFs)

for beta exposure. Though still in the early stages of implementation for non-

institutional investors, the splitting of alpha and beta is an important trend with a

significant impact on the industry. Many expect the continued growth of ETFs,

outcome oriented solutions, success for top long-only diversified fund managers,

and growing inflows to boutiques. Moreover, with increasing regulatory scrutiny,

developments in asset allocation modeling, challenges to margin expansion and

the movement of so-called “alternative” investments down-market, convergence

across a wide variety of asset management strategies will continue. Both

“traditional” and “alternative” asset managers will have to redefine themselves to

grow.

Communicating the benefits of mutual funds effectively remains the central

challenge. Outside of markets with a strong retirement foundation and comfort

with mutual fund investing, such as the US or Australia, a key challenge is to

communicate the advantages of mutual fund investing to overcome investor

anxiety and structural limitations of bank distribution, and to maintain confidence

in the vehicle. A positive side effect of the financial crisis will be the increased

opportunity to educate investors in Asia and emerging markets about

diversification and long-term fund investing in which mutual funds play an

important role. Globally, distributors need to work in partnership with investment

product specialists and their sales teams to ensure proper expectation management

at the point of sales. Further co-education at the distributor sales person and

client level will be important, particularly for large scale managers with the

requisite resources to make such efforts effective. And some key firms and chief

executives need to take a public leadership role with governments, regulators, the



media and industry associations to inform and educate all parties about the role of

mutual funds in the investment process.

The growing fiduciary role of distributors is leading to greater concentration of

fund flows regionally. This contrasts with the growth of emerging regions and

complicates the decentralization of distribution efforts. It also accelerates the pace

of change in the industry and leadership rotation: two thirds of the largest 50 fund

managers today were not among the top 50 ten years ago. We have seen

numerous examples around the world of how one blockbuster product can either

help build or destroy a company brand. Diversification of product lines for asset

managers will only become more important as market volatility and uncertainty

remains high. These developments reiterate the heightened attention to product

development and management.

Greater business and product complexities require a new “breed” of analytical

sales and product specialists. The necessity to build multiple relationships with

key advisors in distribution firms locally requires what Strategic Insight calls

“creative data analyst” (CDA) teams to work closely with sales teams and

management on an ongoing basis to educate the political center at home about the

importance of non-domestic opportunities in the coming years. There is a clear

need for a “renaissance” sales person, but within a team of specialized skills and

with a broad mandate and concrete incentives across channels (insurance, retail,

wholesale, institutional, etc), markets or product lines, as in the past a lot of firms

have been constrained by legacy silo sales structures with no monetary reward to

“reach across the aisle”. Only CDA teams and senior executives with the

necessary firm-wide authority can implement such broad structural changes.

Fund managers building global distribution need to find new ways to partner with

distribution organizations and to offer credible analysis, pro-active

communication and innovative marketing ideas that go beyond product and

performance analytics. The CDA team should include experienced analysts and

senior executives with strategic and tactical responsibilities along with incentives



to build relationships and raise sustainable assets (retention versus sales based

bonus). For many years in the US, Strategic Insight enabled the “information

gatekeepers” to stimulate their company’s expansion through early use of

competitive intelligence. Today, Strategic Insight’s global research team, guided

by the powerful lens of our Simfund Global database, is observing similar

competitive benefits for some of our global clients, who already have a CDA team

in place.


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Contact the authors:

Daniel Enskat, Head of Global [email protected], +1 (212) 217-6859

Jag Alexeyev, Head of Global [email protected], +1 (212) 944-4456

Strategic Insight590 Fifth Avenue, New York, NY 10036Tel: +1 (212) 217-6957 / Fax: +1 (212) 730-7730

www.sionline.com www.StrategicInsightGlobal.com

Strategic Insight590 Fifth Avenue, New York, NY 10036Tel: +1 (212) 217-6957 / Fax: +1 (212) 730-7730


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global fund distribution - strategicinsightglobal.com · shifting tectonic plates: from pariah to...

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