Emerging Trends in the Global Fund Industry

Transcription

1 Emerging Trends in the Global Fund Industry August 2011 Karin Anderson, Senior Fund Analyst 2009 Morningstar, Inc. All rights reserved. <#>

2 Outline Fund Flows Exchange-Traded Funds Alternatives Fund-of-Funds and Target-Date Funds 2

3 Fund Flows Highlights Broadly see more money going into fixed income than stocks Fixed income, investment grade over high yield and bank loan Among equities, emerging markets equities the big winners (75% of inflows in past 12 months) Alternatives seeing significant growth globally Commodities Recent outflows after steep drop in silver and commodity prices Longer-term trend of inflows still strong globally Exchange-Traded Funds Same taxable bond trend, outflows in commodities ($101B ETF vs. $44B Open End Fund) The chase for yield in slow growth/low interest rate environment Global currency bonds, dividend-paying stocks, real estate investment trusts, master limited partnerships Source: Morningstar Direct collects fund flow data from 62 countries 3

4 Fund Flows US Open-end and Money Market Funds ex Fund of Funds Estimated Net Flow ($Mil) Asset Class June 2011 YTD 12 Months Total Assets 12/31/2010 ($Mil) Growth Rate 2010 (%) U.S. Stock (18,024) 8,200 (48,678) 3,433, % International Stock (1,334) 18,300 41,102 1,353, % Balanced ,175 30, , % Taxable Bond 11,878 92, ,510 1,855, % Municipal Bond 981 (22,145) (29,264) 471, % Alternative 993 5,814 15,566 92, % Commodities 512 6,278 13,408 44, % Money Market (41,392) (113,442) (91,862) Source: Morningstar Direct Fund Flows 4

5 Fund Flows continued Global Open-end and Money Market Funds ex Fund of Funds Asset Class Estimated Net Flow ($Mil) June 2011 YTD 12 Months Total Assets 12/31/2010 ($Mil) Growth Rate 2010 (%) Allocation 3,511 53,621 88,261 1,866, % Alternative ,775 29, , % Commodities 674 8,776 16,466 80, % Convertibles (1,931) 6,092 6,845 74, % Equity 139, , ,109 8,339, % Fixed Income 37, , ,538 3,921, % Property (115) (187) (2,202) 144, % Tax Preferred 1,000 (21,884) (28,980) 471, % Money Market (81,388) (162,665) (143,241) Source: Morningstar Direct Fund Flows 5

6 1200 Exchange-Traded Funds The Growth Story Net Assets ($Bil) # of ETFs Source: Morningstar. 6

7 ETF Growth by Asset Class 1,200 1,000 Commodities Alternative 800 Municipal Bond Taxable Bond In $Bil 600 Balanced International Stock U.S. Stock Source: Morningstar. 7

8 Top 15 Largest ETFs Launched in 2010 Assets as of Sept. 30 Name Ticker Net Assets Inception Date ETFS Physical Platinum Shares PPLT $564 1/8/2010 ETFS Physical Palladium Shares PALL 497 1/8/2010 WisdomTree Emerging Markets Local Debt ELD 353 8/9/2010 ALPS Alerian MLP ETF AMLP 271 8/25/2010 Schwab Emerging Markets Equity ETF SCHE 204 1/14/2010 ishares MSCI Indonesia Invstble Mkt Idx EIDO 199 5/5/2010 PowerShares CEF Income Composite PCEF 171 2/19/2010 First Trust BICK Index BICK 166 4/12/2010 Global X Silver Miners ETF SIL 159 4/20/2010 UBS E-TRACS Alerian MLP Infrastrctr ETN MLPI 153 4/1/2010 Market Vectors EM Local Curr Bond ETF EMLC 104 7/22/2010 Vanguard S&P 500 ETF VOO 104 9/7/2010 ProShares UltraPro QQQ TQQQ 89 2/9/2010 Credit Suisse Cushing 30 MLP Index ETN MLPN 84 4/13/2010 ishares MSCI Poland Investable Mkt Index EPOL 75 5/25/2010 Source: Morningstar Direct Fund Flows 8

9 The Mutual Fund vs. ETF Debate ETF vs. Mutual Fund debate often becomes confused with a debate about active vs. passive investing Name 2010 Base Currency 2009 Base Currency Bolsa De Santiago IPSA Chile Average Chilean Equity Fund ishares MSCI Chile Investable Mkt Idx S&P 500 TR Average Large Cap U.S. Stock Fund ishares S&P 500 Index Actively-managed and ETFs each have their place ETFs more commonly used as trading vehicles than investment vehicles Between 30% and 40% of all daily volume on the exchange is ETFs Options on ETFs are accounting for a similar percentage of CBOE trades as well Greatest challenge is how to incorporate this into a business model 9

10 Canada ETF Market vs. U.S. ETF Market 10

11 Alternative Investments Morningstar s Definition Alternative Investments should provide: Lower correlation to traditional stock and bond portfolios Positive risk-adjusted returns over time How do investments meet this criteria? Shorting or hedging Investing in different instruments What Morningstar does not consider alternative: Equities with commodity exposure, publicly traded REITs, emerging market stocks or bonds Investment vehicle agnostic 11

12 Flood of New Alternative Investments New alternative funds have flooded the US market place in the last decade, in both mutual fund and ETF form Morningstar tracks 450 such funds, 203 mutual funds and 247 ETFs New Alternative Funds Number of New Alternative ETFs & Mutual Funds 12

13 Investors Appetite for Alternative Mutual Funds Flows in to alternative mutual funds have grown rapidly in 2009 and 2010, especially in the Long-Short and Market Neutral categories US Alternative Mutual Fund Flows 20,000 15,000 $ millions 10,000 5, , Bear Market Currency Long-Short Market Neutral 13

14 Morningstar s Alternative Mutual Fund Categories Long-Short funds use shorting, but remain net-long in exposure Market Neutral Category: Funds with equity beta exposures between -0.3 and +0.3 and which have strategies that generally attempt to be market neutral Bear Market funds take a net-short equity exposure, and can be leveraged Currency funds take short-usd, long-usd, or long-short strategies such as valuation, momentum, and carry trade 14

15 2010 Morningstar/Barrons Alternatives Survey 15

16 2010 Morningstar/Barrons Alternatives Survey (continued) 16

17 2010 Morningstar/Barrons Alternatives Survey (continued) Most advisors allocate less to alternatives than institutions, generally between 6% and 10% The majority of advisors have clients that are asking for alternative investments 66% of advisors believe that alternative investments will become as or more important than traditional investments over the next five years Both advisors and institutions are investing in alternatives for diversification and better risk-adjusted returns, rather than absolute returns 17

18 Target-Date Funds Primary vehicle for retirement savings In 2007, U.S. Department of Labor included target-date funds in set of default investment funds for employers Common in defined contribution plans, IRAs Glide paths Set-it-and-forget-it aspect 18

19 What s driving target-date growth? The structure and regulation of U.S. retirement plans Defined contribution plans primary area of growth Regulators and gatekeepers like ease of use and potential for better investor outcomes Sticky money in 401k plans Excellent fit for APV and APVC series 19

20 Target-Date Fund Growth Strong But Leveling Annual Target-Date Fund Flows ($mil) Total Target-Date Fund Flows 14,149 22,114 35,274 58,452 43,071 45,030 47, 445 Organic Growth Rate % As of December 31, 2010 Total assets in open end target-date funds: $341 billion Total assets reported in target-date funds in CITs: $33.7 billion 20

21 Inflow Rate Surpasses Comparable Fund Categories Net Flows and Organic Growth Rate by Broad Asset Class, US Broad Asset Class Estimated Net Flow $ 2009 Organic Growth Rate % 2009 Estimated Net Flow $ 2010 Organic Growth Rate % 2010 Alternative 14,981,634, ,882,689, Balanced 271,451, ,418,861, Commodities 10,212,431, ,628,271, International Stock 22,944,555, ,406,536, Municipal Bond 72,772,682, ,042,550, Taxable Bond 290,417,135, ,651,244, U.S. Stock (23,768,411,227) (1.05) (75,140,990,463) (2.50) 21

22 Growth Rates and Market Shares by Distribution Channel 22

23 Target-Date Fund Structure Capital appreciation vs. capital preservation Plain-vanilla vs. exotic asset allocation Target date vs. lifetime allocation 23

24 Active vs. Passive, Open vs. Closed Architecture Active funds still predominate More than half of all series have >90% of assets in active strategies About one-fifth of series have mixed approaches Fully passive series still in minority, but growing (Fidelity, TIAA-CREF, BlackRock, John Hancock, Maxim) Open-architecture strategies remain in minority But newer open-architecture series gaining traction (Russell, Maxim, Guidestone) 24

25 Glide Paths Exhibit Range of Philosophies Equity Allocation % per Target Year Average % Minimum % Maximium % Number of Funds

26 No Consensus on To vs. Through Our survey of 41 glide paths found 22 in through, 18 in to To glide paths accelerate more rapidly toward landing point Prospectus language is often vague, confusing, or incomplete Need more disclosure on investment rationale for glide path, degree of tactical allocation, the role of subasset classes 26

27 No Consensus on To vs. Through Equity Allocations for To and Through Glide Paths 2010 Target Allocations Landing Point Allocations Average % Minimum % Maximum % Average % Minimum % Maximum % Through Funds To Funds NA NA NA 27

28 Average Equity Allocations for To and Through Glide Paths 28

29 Investment Approach Reducing equity exposure: Schwab, Oppenheimer, MassMutual Increasing international equity allocations: Vanguard, T. Rowe Volatility-management and tail-risk strategies: Invesco, AllianceBernstein, Legg Mason, PIMCO Commodities allocations on the rise: T. Rowe Price, Fidelity, Oppenheimer, Principal, and others Alternatives less common 29

30 Unstable Glide Paths Recent Ibbotson study on changes to glide paths for 3 major providers Vanguard s glide path more conservative before 2006 T. Rowe Price s glide path similar to how it was created in 2002 Fidelity s glide path has seen most change 2002 glide path contained 34% equity allocation for a 60-year old in year received 53% equity allocation Source: Bait and Switch: Glide Path Instability by Ibbotson Associates, a Morningstar Company 30

31 Average Industry Equity Allocation % for 2009 and

32 Morningstar Risk-Adjusted Return 3-year through Dec. 31,

33 Target-Date Funds in Chile Principal Lifetime Chile Uses glide path Underlying holdings include individual Chilean stocks and bonds, mutual funds, ETFs ING Solucion No glide path Underlying holdings include Chilean stocks and bonds, ETFs 33

34 Contributors Karin Anderson, Senior Fund Analyst Scott Burns, Director of ETF Analysis Kevin McDevitt, Editorial Director, Fund Research Nadia Papagiannis, Alternative Investment Strategist 34

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