By Peter Finnerty, US Mutual Funds and Advisors Leader, PwC –
Sometimes, the biggest challenges can drive the best ideas. This is certainly true of the mutual fund industry. As we look at the year unfolding ahead, we can see how this particular industry — being pressured by areas ranging from fees to regulation — is responding with innovation.
Innovation may be appropriate for an industry faced by rapidly changing investor behavior. For example, as investors, Millennials require new distribution channels (mobile devices), pose unique sales challenges (given their preference for low-cost, passive strategies), and demand transparency (information is a given, not an option).
But the challenges are many. As noted in our recent paper Mutual Fund Developments: Looking back to see what’s ahead, the industry faces the intersection of changing interest rates and increased regulation. With the Fed beginning to increase interest rates, investment strategies may shift; we started to see some of the effects in late 2015 as reduced market-making capacity in the high-yield bond market led to w
ider bid-asked spreads, particularly for the least creditworthy issuers. In addition, the SEC’s increasing emphasis on mutual fund liquidity— demonstrated in both the liquidity and derivatives proposals—may result in increased holdings of more short-term and/or highly liquid assets over time. This could potentially put a damper on certain strategies.
Additionally, the impact of election-year politics, geopolitical uncertainties, and lingering anxiety about the stability of China’s economy—combined with continued commodity volatility, interest rate changes (domestically and abroad), and diverging investor preferences—will continue to present challenges. And the regulatory spotlight will fall on several areas, including bond fund liquidity management, the US Department of Labor Fiduciary Standard, the costs/disclosure of distribution, the use of derivatives, and new product features. All of this is against a backdrop of fundamental shifts across the broader asset management industry, such as changing demographics and distribution methods, and the growth of passive investment products.
All that said, I think the year ahead will have its bright spots.
Even under an enhanced regulatory microscope, products such as ETFs and liquid alternative funds are expected to continue to grow and evolve as the investing public sees the unique benefits that only the larger mutual fund industry is able to provide.
We expect to see mutual funds continue to embrace and deliver on the digital experience. By continuing to leverage the power of digital technology, asset managers will drive the highest and best value in investment decisions and client relationships, will likely lower costs and generate value from operations.
Technology will continue to underpin the mutual fund industry—from current firms to possible new market entrants. We expect funds to seamlessly integrate new technology with an agile operating model and infrastructure, adapting to dynamic changes in client demands, new regulatory requirements, and shifting cost structures.
We also expect mainstream adoption of the technologies used by automated adviser platforms, particularly “robo-advisers,” across the larger fund houses. Many providers will develop their own offerings—rather than use existing platforms—so they don’t miss out on this market trend as they adapt to the demands of a new client base.
In an industry where the only lasting competitive advantage is creative thinking, some funds risk becoming irrelevant—if not extinct—by failing to evolve. For traditional mutual funds, the race is on to gain a firm hold on investors’ share of wallet. Product developers must continue to track emerging investor types and identify unmet needs.
Only by using the right tools and targeting the most promising markets will the best-performing mutual funds outshine their many competitors in the marketplace, earning for themselves the opportunity to face another year of adapting, evolving—and, ultimately– thriving.