Active equities: how’s your marketing alpha?

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Today’s chart, prepared by our analyst Michael Toh, shows the depths of the misery in the active equity funds business. The chart shows launches of new funds and average assets per fund; and we have removed the market effect from average assets to give a better sense of investor movement.

Although neither measure is perfect, the message is pretty clear. Active equities are back to activity levels last seen in 1997. To restore the peak of average assets, we would need to cull about 40% of Australian equity funds. We have far too many funds for the reduction in demand which has been experienced.

Having been around in 1997, this feels about right. 1997 was also a period of dissatisfaction with equity funds and I had just started at Rothschild as a product manager. The biggest product problem was the underperforming flagship – the Five Arrows Australian Equity Trust.

Rothschild was a great name in managed funds, but struggled for most of the 90’s. Yet it got back into the game. How? It wasn’t performance. Rothschild’s problems in Australian equities were never fully resolved. But it got a couple of things right (to the credit of the overall management team) – which makes it a useful case study:

It embarked on a vigorous product development program, delivering a slew of new products across Australian equities, global equities and alternatives in particular.

Critically, it recognised and embraced a major change in the market earlier than many other asset managers – the move away from retail funds, to wholesale funds accessed via platforms.

The response was partly about delivering capability in the form demanded by the new channel. But there was much more to it, including a new service model for planners and platforms, a new key account model, and a new business model to permit it to be done profitably.

Although investment in brand, advertising, and communication initiatives are important aspects of responding to a changing market, it needs to be informed by insight based on a deep understanding of the market, its competitive forces, and recognition of how it is changing. This is the essence of marketing.

The lack of insight is a key reason why competitors get blind-sided when the market changes. Indeed, successful players are often most at risk. Having enjoyed success over a long period of time, it’s easy to discount or ignore the signs of change, which are often gradual at first. By the time the signs are overwhelming, it may be too late to react.

In contrast, entrants – or hard-pressed competitors such as a Rothschild in the late 90s – will race to exploit market changes as an opportunity to establish or restore their fortunes. They have little to lose in doing so.

What can we take from this for today’s problems in active equities?

Firstly, there are grounds for hope! But not by doing nothing and simply hoping for the best.

– As discussed last week, new product ideas will generally be part of a solution. But new products are pointless if not pointed in the right direction or delivered in the right form.

Good investment performance is also important. But there are managers with great performance and no flow. So it’s not just about alpha either.

Or maybe it is – but the alpha we need now is marketing alpha perhaps even more so than equity alpha. What’s that I hear you ask? Marketing alpha is superior business results derived from genuine insight. In a later Trialogue, we’ll talk about how that might be generated.

Posted In: Trialogue