When Size and Performance Really Don’t Matter: The Fund Marketing Dilemma
There’s plenty of solid evidence to demonstrate that fund performance and fund size are not what’s most important to investors. But many asset managers stubbornly refuse to accept those new realities of asset accumulation.
The longstanding skepticism of fund managers regarding the value of marketing has some merit, because most of the evidence to support investment in related activities is supplied by marketing firms. Last year, however, a small Connecticut-based investor relations firm – Chestnut Advisory Group – engaged Rivel Research Group to produce some of the most objective and compelling evidence to support the premise that neither size nor performance are the primary fund selection factors for investors and asset allocators.
To examine whether capital follows investment performance or fund size, the study analyzed eVestment data for 931 investment products for a 7-year period (2006 – 2013), across four distinct asset categories representing long-only products, including: US Small / Mid-Cap Equities; Global Fixed Income; Emerging Markets Equities; and US High Yield. The study involved investors controlling $429 billion of capital and consultants advising on assets of $10.5 trillion.
A rigorous examination of the relationship between investment performance and net asset flows in a variety of ways – including the correlations between those two variables and the characteristics of the most effective asset gatherers – generated these top-line findings:
Asset managers who delivered the best investment performance did NOT raise the most capital. In fact, the top investment performers raised less than 25% of the capital raised by the top asset accumulators. This pattern was consistent across the study’s four asset categories.
The top net asset flow gainers raised more than four times more capital than the best performers. Top quintile funds ranked by trailing-three-year returns raised about $42 billion, while top quintile funds ranked by net flows raised more than $175 billion during the same period.
Fund size does not matter to investors. The study showed that both smaller and larger asset managers raised significantly more capital than the top performing funds. In fact, smaller funds grew by 237% on average, and raised almost three times more dollars than the top performers.
The correlation between investment performance and capital flows is very low. Although positive, the correlation is between 0.04 and 0.24, and may account for only 15% of the reason for placing money with managers.
On the survey side of the Chestnut / Rivel study, which explored the expressed reasons why investors and allocators select (or ignore) a particular asset manager, here are the 5 factors that investors rank as most important (with “investment performance” noticeably absent):
Strong understanding of firm’s investment process 95%
Asset manager credibility 89%
Strong understanding of the firm’s risk management 82%
Clear and consistent communications 77%
Confidence in firm’s business structure & incentives 77%
In random fashion, here are a few other insights from this study worthy of consideration:
Allocators may select large funds not because they are large, but because they do a much better job of communicating and building trust. According to McKinsey research, at the largest global asset managers, sales and marketing costs represent 24% of their cost base, second only to the investment management function.
Trusted asset managers get hired more quickly. Nearly 60% of the survey respondents said their hiring time frames are significantly shorter when hiring an asset manager in whom they have a high degree of trust. Investors estimate that this trust can save between 3 – 12 months in the hiring process; representing for the asset manager $25,000 to $100,000 (based on an average 1% fee) for every $10mm in additional assets.
Trusted asset managers get fired more slowly. Underperforming asset managers who are trusted are given about 2 ½ years before they are terminated; compared with less than 2 years for managers who are not trusted.
An interesting (albeit self-serving) observation in the Chester / Rivel study is that the marketing / communication sophistication of asset management business today is akin to where public companies were 40 years ago. Since that time, public companies have learned the importance of investor communications and most have established the necessary disciplines to build understanding and trust…which is reflected in stock price, volatility and investor loyalty.
Despite the growing body of evidence, with too few exceptions, asset managers view branding, marketing and investor communications either as a necessary evil, or a worthless investment. Whether this viewpoint is based on arrogance, ignorance or apathy, asset managers that consistently put fund performance ahead of building investor trust and confidence will increasingly be marginalized – based on what reliable research is telling us.
So the question is no longer if marketing Neanderthals will survive. The question is how long it will take for them to either change, or to close their doors.