Fund firms run out of ideas as crisis bites
LUXEMBOURG (Reuters) - Fund managers are struggling to come up with new ideas to win back clients following the mayhem in financial markets over the past 18 months.
Asset management firms have been burned by falling returns and heavy redemptions - and now a deepening mistrust from clients is putting the brakes on any new product innovation at a time when many feel it might be most needed.
Speaking at the Reuters Funds Summit in Luxembourg, fund managers and industry experts said the flight from complex structured products, sparked by the credit crisis, had left the asset management industry floundering.
"Fund managers are crouching down and hoping the financial crisis will go away -- but of course it won't," said Avinash Persaud, chairman of consultants Intelligence Capital.
"With savings set to rise in Europe, unless fund managers produce new instruments that provide safe and long-term investments, the money will go elsewhere. It will be a real missed opportunity."
Late 2008 and early 2009 were marked by a shift into cash by many investors and even less-risky money market funds lost out to bank deposits that have become effectively state-guaranteed.
"Fund managers are very product-driven. They sell what they have rather than what clients need," said Amin Rajan, Chief Executive of industry think-tank Create Research.
Europe's 6.1 trillion euro ($8,230 billion) fund industry saw investors pull out a net 284 billion euros last year, notably in October.
That has an immediate impact on fee income at companies which have often sought to boost revenues by introducing just the kind of innovative, and high margin, products which have fallen suddenly out of favor.
Alex Schoeb, Chief Investment Management officer at Switzerland-based asset manager Swisscanto said the firm had not launched any new products in the last six months.
Schoeb said product innovation was at its minimum across the industry, with physical gold funds such as the ones launched by Julius Baer (BAER.VX) and Zuercher Kantonalbank in the autumn about the only significant new products launched.
Funds could claim they are only responding to the prevailing mood of their clients who have come to view innovation as "a much used, misused and abused word in the investment lexicon," according to Rajan.
He illustrates the bitter sentiment of institutional clients by citing a letter he received recently from a pension fund trustee: "Fund managers get rich when I don't do very well. Fund managers get very wealthy when I'm doing well."
However, Georges Wolff, head of fund manager selection at ING Private Capital in Luxembourg, believes fund managers must bite the bullet and continue to seek out creative solutions.
"Investors are looking for downside protection and active management of downside risk and you can only get that through complex instruments so there is a contradiction in this argument for simpler products and the need for capital protection," he said.
Emiliano Laruccia, chief investment officer at Eurizon Capital in Luxembourg agreed.
"The client is asking for plain vanilla stuff, but if you propose government bonds, for example, in a fund they are not happy about the return.
"So the tendency is to offer something that is not plain-vanilla because the client is not happy with a return which is risk-free."
While few new products are being launched, fund managers are also seeking to cut back on their costs by slimming down their current product offering.
Yves Francis, a partner at consultant Deloitte in Luxembourg, said firms would increasingly look to restructure their existing funds by either merging them or shutting them down.
"I would expect to see product rationalisation -- some of these products are not easy to understand. There's going to be a lot happening in terms of product range," he said.
Jose Placido, chief executive of RBC Dexia Investor Services, added: "We expect to see fund managers streamlining a lot of their funds, particularly their equity and absolute return funds."
Laruccia said that number of funds on the firm's multimanager buy list had fallen from 500 in 2007 to around 100 at present.
"A lot of them have just disappeared," he said.
(Reporting by Raji Menon; Editing by Joel Dimmock and Hans Peters)
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