Are we failing in product development?

Last week we emphasised the value of a strong product function and outlined a number of markers to identify high quality, successful product teams. The primary focus of most product teams is in product management – a critically important function. Products require constant tinkering in order to keep up with regulatory and tax changes and meet customers’ changing needs (as well as regular upkeep to prevent them from blowing up).

Product development is equally important, especially where customer preferences are on the move – think Australian equity funds or the pension divisions of superannuation funds. Customers aren’t happy with the current solutions on offer because their needs aren’t being met. Product development is clearly required.

Yet product development is expensive (about $250k for a fund, $20m+ for a new super product and much higher again for a platform). It is also time consuming (rarely less than 6 months, often more than 18) and difficult to get right – as shown in today’s chart.

Despite an enormous product development effort over the last 15 years (940 managed funds in the universe for our Tria Managed Funds Review have been launched over that timeframe), only a quarter of inflows go into those products, meaning a staggering three quarters of inflows go into funds older than 15 years.

So has there been a failure in product development for an entire generation? Not quite. There have been a number of stellar new products brought to market even over the last 10 years (Magellan Global, the Shadforths Mosaic series and the CFS Global Infrastructure fund to name just a few). 20% of the funds launched in the last 10 years have reached scale (which we’ve defined here as >$250m in FUM and therefore likely to be generating a reasonable return for the asset manager).

But there have also been mistakes along the way. A full 45% of funds launched in the last 10 years that have failed to reach scale are multi-sector funds (and, even if we remove the more recently launched MySuper products, the figure is almost 30%). The sector is currently taking the lion’s share of flows (almost $6b of the $11b in netflows into managed funds in the last year have flowed into multisector funds), which you would expect will continue to spur product innovation.

So where is product development most rewarding? The data indicates global equities and fixed income – new funds in this asset class were about 50% more likely to generate significant amounts of FUM than other asset classes.

What does this tell us? The majority of fund developments actually destroy rather than create value – so it’s an activity set that requires focus. Good product development comes from a deep understanding of what customers and intermediaries need, a specialist skill set and a strong process – but even then success cannot be guaranteed because nobody can see into the future. So a bit of luck is required as well.

The point is not that we should stop developing new products – if these statistics tell us anything it’s that we need a portfolio of new products in the market if we want one to take off. A portfolio of new product ideas that are truly innovative and respond to evolving customer needs.