Wary retail investors limit fund innovation

LUXEMBOURG Wed Mar 24, 2010 12:33pm EDT

LUXEMBOURG (Reuters) - Scars from the financial crisis have driven retail investors to demand simpler savings products and an escape from benchmark-linked funds, asset management executives told the Reuters European Funds Summit.

Before the downturn, many in the industry were preoccupied with products that sought benchmark-busting returns for higher fees, but few investors escaped the crash and the ambitions of product developers have fallen down to earth.

"Low margin products are on the rise," said Fathi Jerfel from Amundi, the French fund management firm owned by banks Credit Agricole (CAGR.PA) and Societe Generale (SOGN.PA).

Fund firms point to evidence that retail investors have returned, but delegates at the Reuters Summit said they were focusing, above all, on preserving their money and capital as the overall economic outlook remained uncertain.

Jerfel said products such as exchange-traded funds (ETFs) were proving more popular than more complex offerings that might target higher yields, but that incurred large losses after the credit crunch struck.

Andrea Favaloro, head of retail products in Europe for BNP Paribas (BNPP.PA) Investment Partners and Fortis Investments, told the Reuters Summit his firm was about to launch two new capital protection funds to tap client demand for products that limited losses.

"I have two words that I use when I meet clients and internal sales people -- transparency and simplicity. The more you can make it transparent the more you put your clients at ease," said Favaloro.

Global head of fund services at Citi (C.N), Sanjiv Sawhney, said that although high net worth individuals (HNWs) and institutional clients were still eyeing hedge funds and private equity, retail customers were playing it safe.

"There is a bit of back-to-basics," said Sawhney.

"The retail investor is looking for lower risk, lower volatility, and more about capital protection," he said.

Schroders' (SDR.L) managing director in Luxembourg, Noel Fessey, said retail investors were "still incredibly cautious."

Eric Helderle, managing director of French fund firm Carmignac, told the Reuters Summit his firm had struggled to sell a new small cap emerging markets fund as investors fear a fresh shock: "They don't want to hear about it."

ABSOLUTE RETURNS

There are some areas, however, where firms are managing to push out more high-margin products for retail investors.

Favaloro said his firm planned to launch a new dynamic asset allocation fund, designed to pick outperforming stocks and reflecting customer aversion to benchmarked products whose reputations were damaged during the crisis.

Paul Freeman, managing director for product development and range management at BlackRock (BLK.N), said his firm was seeing a similar trend toward absolute return funds, which are not tied to a benchmark.

Helderle said the search for absolute performance was a major trend in the investment world.

It was a view echoed by Leo Willert, head of trading at ARTS, the computer-driven investment arm of Austria's C-Quadrat.

"Investors are mainly looking at products that are able to reduce their risk in times when stock markets lose heavily. They don't want an investment that says 'the MSCI World was down 55 percent and mine was only down 49'," he said.

"It's an interesting time now. What we see is that money is being reinvested from benchmark-oriented funds into asset allocation models."

(Editing by Simon Jessop)

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