B. Venkatesh
Asset management firms continue to offer standard investment products such as fixed maturity plans, equity funds and, now, passive products on foreign indices. Investors do not always understand how to effectively utilize these products to create an optimal portfolio. Most do not seek professional investment advice either. The question is: Can asset management firms bridge the knowledge gap and channel investor resources optimally?
This article explains why asset management firms should offer investment solutions and not just products. It also explains how such solutions can be structured to improve investment experience for the end-users.
Asset management firms typically look to improving customer base through product offerings. This has resulted in most firms offering similar repertoire - equity funds, bond funds and gold ETFs. The value differentiator is generally the fund performance, though the statutory warning suggests that `past is not an indicator for the future.`
Yet, investors use past performance to choose a mutual fund. In the process, they do not actively choose alpha-generating funds and the alpha managers do not necessarily attract more investors.
Offering investment solutions could, perhaps, prove useful in several ways. For one, the differentiator would be the solutions offered, not the product. Though investment solutions can also be replicated, the offering need not be same.
Suppose an asset management firm were to offer a closed-end education fund that will enable investors pay for their child`s education at 18. The firm may decide to have 70% equity exposure, 20% bond exposure and 10% gold exposure with tactical range of 10%.
Another asset management firm may have a different asset allocation strategy for the same investment solution. An investor`s choice would depend on her preferred asset allocation, not just the fund performance.
For another, asset management firms may be able to attract even self-directed investors who may find such solutions useful. And for the investors who do not wish to pay for advisory services, such investment solutions could come cheap.
The question is: How should firms offer such investment solutions?
Portfolio structure
Consider the education portfolio. An asset management firm can offer such a solution either through direct asset exposure or through a fund-of-funds structure.
Direct exposure may be deviating from the traditional two asset-class (balanced) portfolio, as the fund will have to carry equity, bonds and, perhaps, gold. A fund-of-funds structure would be less complicated and more flexible- the fund will invest in equity funds, bond funds and Gold ETFs.
True, investors may have to incur additional costs for buying the investment solution - fund-of-funds fee of 50 basis points. But that would be a small price to pay for the manager selection skills of the fund-of-funds manager. This is, indeed, a valuable service for the investors who will otherwise find creating a portfolio of mutual funds a not-so-easy task.
There is a behavioral advantage too. The feeling of regret may be less when an investor buys mass investment solution from an asset management firm. Why?
A custom-tailored solution received from an investor advisor, though good, may sometimes not be enough. This is because the investor may feel that she could have done better by taking a more niche solution from another investment advisor. Choosing among several advisory service providers is not always easy. A mass investment solution helps, as the investor knows that her acquaintances also received the same solution as she did. Failing with the crowd, in the event the portfolio loses value, causes less regret.
Conclusion
There is a tremendous potential for asset management firms to offer mass investment solutions. Firms could use fund-of-funds route to offer solutions with even existing products.
Such offerings could provide cheaper solutions for retail investors and become a value differentiator for firms. Investment advisors could also use such products to custom-tailor portfolios for HNIs.
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