Friedrich August von Hayek (Nobel Prize winner, economics) once used the term catallaxia when he only wanted to express that modern economies offer ever-greater opportunities for those involved through the increasing division of labor or “optimization of the value chain”.
In addition to the positive aspects of additional choices (procedures, products, partners, processes), however, in the asset management area of product communication and product sales, investors often hear the New German capitulation formula “information overflow” – “the mailbox is full – nothing more is possible”. Can new, information-intensive SRI (socially responsible investment) products that require explanation still attract the interest of investors in the future? What are the possible stumbling blocks?
Closed-end fund providers – an industry in turbulent times
Many closed-end investment funds are in a sales crisis. With exceptions, however: In the area of fund concepts from the SRI sector (solar, hydropower, infrastructure, etc.), it can be seen that the topic is becoming increasingly attractive for institutional investors. It seems problematic that the closed-end fund’s sector often does not enjoy an unlimited reputation among these investors: A perceived “white sock distribution image” and less streamlined fee structures appear to be possible points of criticism here. Whether these points represent well-founded judgments or simply often only prejudices are not to be discussed here: The fact is that the “retail image” does not facilitate the distribution of SRI products in this area.
Separate worlds – providers and investors often find it difficult to find each other
In the Capital Markets and Asset Management market segments, the trend is that the interfaces here have become more permeable. One example is the UCITS format, which, among other things, has paved the way for many hedge fund concepts to enter the classic mutual fund industry. The ETF industry also has an interesting mediating role.
The described trend of convergence of “industry sectors” is old – why should it be different in the field of closed-end funds and SRI investments? Retail versus institutional – with differences in product design, project management, technical administration, controlling, prospectus design, reporting, fee structures – all communication barriers on a small scale, which tend to make the decision basis for institutional investors in product selection rather demanding. In terms of communication, this area remains a dominant challenge for experts in product management, marketing, and sales.
Investment companies – possible bridge builders to institutional investors?
“The grass is always greener in the neighbor’s garden” – Of course, product providers of SRI products are also intensively looking for increased access to institutional investors. Regulatory issues, investment limits at institutional investors, the appropriate product cover, and fee structure for the fund – questions that are perhaps sometimes discussed more “one-dimensionally” in the area of closed-end funds (retail).
Some fund initiators in the asset management sector and family offices with mutual fund solutions just as well as the corresponding providers of closed vehicles in the SRI segment are more discussing this topic: What is the appropriate product shell to meet more “open doors” with institutional investors? Investment companies in the private label funds segment are giving this topic some thought: whether Universal Investment, Hauck&Aufhäuser, IP Concept, or AmpegaGerling – all these institutions are receiving increasing inquiries from these sectors. Houses such as DWS, Deka, and Union Investment are also engaged in intensive dialog with providers and investors.
Product cover – a possible “hygiene factor” for product success
To be fair, it has to be said that in the end, the project quality should be the deciding factor in SRI investments. If one speaks with many product providers or project concept developers and compares their ideas with the needs of institutional investors, something astonishing often emerges: Certain initiators of closed-end fund products often have insufficient contacts and experience with institutional investors.
On the other hand, many institutional investors also find it difficult to deal with the sales prospectus world and “transparency” in the area of closed-end funds. It is absolutely a suggestion for rating agencies to work on a new field seriously. An opportunity exists because even the classic asset management consultants still have some gaps in their know-how in the field of SRI and SRI fund constructions. Who knows in detail about the differences between special funds according to Part II (Luxembourg), SICAR, SIF, special funds, and other special funds? Who knows exactly when the closed-end fund might be the appropriate packaging after all, or whether a bond is an optimal solution? Perhaps you will end up with the “classic” open-ended mutual fund again.
Distribution, “Investor Education” and an eagle look
The product packaging is one thing, but other things can be topics such as qualification of sales and the know-how of institutional investors. Discussions on roundtables with domestic and foreign family offices have also shown that criticism should not always be directed only at the sales side. Of course, there are “talking fact sheets” without dialogue added value and there is a quite noticeable number of (badly said) “thin-board drills” with technically manageable product know-how. However, it can be objected that there is still some uncertainty among some investors as to how they should evaluate some SRI projects. Especially in the SRI project environment, technical aspects are increasingly coming into play, in addition to the well-known financial aspects: many interfaces, a lot of technology, many products covers – who can claim to always have the eagle eye?
It is often overlooked that the seed money search is hardly ever discussed. There is little information in the technical literature and in direct discussions with investors about how many economically soundly designed SRI projects fail right from the start: no upstream systematic product check, incorrectly prepared materials, and no target-group-appropriate seed investor approach often go hand in hand.
Where can the journey go?
Similar to the field of open funds, the optimization or redesign of processes in product management and sales of originally closed fund structures begins with the fund provider. Many closed-end fund initiators are currently putting their business concept to test, especially in the areas of alternative energies and infrastructure. “Poorly” designed or calculated products will not meet with much response from institutional investors. If these products are additionally managed by salespeople who speak the language of retail investors, the process of cleaning up the industry could gain even more momentum. For successful providers with institutional qualities, the following applies: Design good things and communicate about them!