Comment: The use of mutual funds as “door openers” for institutional investors

Original sound from a few years ago: “IFRS on the advance”, “Death of the special fund”, “Public funds are also becoming more popular with institutional investors” – at present, at least on the media side, there are signs of broad acceptance for this product cover, and this trend has also become established among institutional investors.

The intensified discussion also began in the background before the investment directive. Already in 2003, 2004, and 2005, various consulting firms had conducted studies on individual points of this topic in the context of the then-pending investment directive. Much recent research, publications, and also the popularity of the ETF underline this trend. Is the special fund a discontinued model? To anticipate the answer: Of course, the special fund will continue to exist as a target group-specific problem solution. One reason is that many customers want to influence decisions and have responsible portfolio managers “within reach”. The development in the area of the Master KAG solution also confirms this fact.

One product – two “sales cultures”?

In the past, there has been a strict separation between the so-called retail and institutional customers. In between, there was and still is the semi-institutional area, e.g. the support of “resellers” such as the asset management division of banks. The dividing line between the areas could be seen in the special fund’s product: a tailor-made product and highly professional, intensive customer care, balance sheet, and tax issues, as well as the well-known investment committee meeting, were assigned to this area. In this context, the mutual fund often led a stepmotherly existence – marginal product, leftover, the preliminary stage to the actual institutional business. “Now what belongs together is growing together”.

For years, it has been increasingly observed that both product types represent adequate problem solutions for institutional customers. On the one hand, investment guidelines provide interesting starting points for the optimization of asset allocation, while on the other hand, the so-called IFRS (accounting standards) are the focus of attention for certain customers. Without discussing details at this point: the possible obligation to show all individual positions of a special fund in the balance sheet puts some previous advantages into perspective, such as the possibility of forming hidden reserves. A reason that has been increasing the attractiveness of mutual funds for many years. In the Anglo-Saxon world, the German special fund is “so to say” unknown. Mutual funds (I-Shares) make up a significant proportion of institutional investments.

What are the advantages of mutual funds? Without at this point also discussing the often cited disadvantages of mutual funds (cost structure, “mass product versus special solution” etc.), it can be said that the mutual fund is now also a successful model in the institutional sector. A few years ago, established consultants were rather skeptical in this respect, but now my so to speak has made his peace with this product shell. The investor appreciates the product, and the trend in the ETF and UCITS (“Hedgefonds light”, Newcits) sector also brought tailwind. Possible lines of development (selection): marketing mix among product providers, product policy. Providers are under pressure to launch “tailor-made” mutual funds for the relevant target groups promptly. Many of the large domestic asset managers, for example, offer special public funds for Depot-A-Manager at Volks- und Raiffeisenbanken. Communication policy Providers must communicate for which target group the mutual fund solution may be preferable to the special fund solution. Example: In the case of pension funds, the purchase of various mutual funds may be preferable to the special fund solution under certain circumstances from an asset allocation point of view.

Often the mutual fund is used here for smaller volumes or test purposes. Due to the transparency, one can speak of the public fund’s figurehead function for distribution. Especially fund advisors and asset managers who issue a large number of private label funds at Alceda, LBB Invest, Universal-Investment, and other capital management companies benefit from this marketing function. The current cooperation of the Association of Independent Asset Managers Germany (Verband unabhängiger Vermögensverwalter Deutschland e.V., VuV) with the company Fondsweb (keyword: fund transparency for public funds) underlines this development.

The intelligent marketing mix is in demand

As to above already indicated: Special fund selling and public fund selling co-operate for years strengthened together, in the past tendencies for demarcation were still noticeable. Already today the public fund representative is often consulted during discussions at Depot A (Volksbanken) or pension funds. Due to the transparency in terms of publicity, competitive know-how is becoming more and more important: What exactly distinguishes my product from the competition? In the mutual fund sector, this approach is well known to fund of funds managers. The soft factors take a back seat here. It is not the customer who demands a tailor-made solution, but the provider who has to face tough competition due to the above-mentioned publicity.

Pricing policy

The fee scales must be optimized. In the long term, the customer will not want to pay more for mutual funds than for special funds, while the volume remains the same. Perhaps this will also have the consequence of putting pressure on the level of management fees of mutual funds for private customers. In the meantime, investors have gained strong negotiating power in this area.

The fund industry – a field of tension between opportunism and strong trends

Old wine in new bottles – just as the much-discussed term absolute return can be associated with the old-fashioned concept of capital preservation, mutual funds have always been a product genre for institutional investors. A statement of tendency can be made: The mutual fund has undoubtedly gained in importance, and new solutions for the customer may emerge as a result of the long-standing discussions. For the providers, optimized mutual fund solutions offer an approach for new business. It is often forgotten that communication-intensive, supposedly trend-driven topics such as sustainability / SRI can be marketed more easily using this instrument. Example: SICAV structures in the photovoltaic sector, climate efficiency, microcredits, etc. Providers such as Sarasin or Swisscanto and SAM have been following this path for years. It can hardly be called fashionable – thick planks are continuously being drilled. The first successes are not long in coming.

The mutual fund offers a promising alternative for target groups that are not addressed by special funds because of the investment volumes involved. Especially “small” asset managers, fund boutiques, and family offices will facilitate market entry in the classic institutional customer segment. This underlines the general line in the product concept of mutual funds and a solid trend in the industry: different share classes, benchmark conception, reporting quality – “convergence instead of confrontation” – and this for years!


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