Asset Managers Scramble to Offer In-Demand Investment Vehicles

Asset managers are replicating existing mutual fund investment strategies in separately managed accounts and collective investment trusts to meet demand from retirement advisers and sponsors, according to new findings from Cerulli.

The demand from clients including retirement plan advisers and providers  for separately managed accounts (SMA) and collective investment trust (CIT) options is likely further eroding the demand for more traditional mutual funds, and even gaining on more recently popular exchange-traded funds, according to research released Wednesday by Cerulli Associates.

More than half (56%) of about 30 asset managers surveyed by Cerulli say they are prioritizing CITs as an opportunity, and even more (60%) are prioritizing SMAs. The two investment vehicles, which tout lower fees, tax advantages, and more customization, are not far behind exchange-traded funds in terms of growth, and are continuing a five year trend of outdueling open-ended mutual funds, the firm says in the research report.

“Asset managers are trying to keep pace with the requests of legacy mutual fund clients that want similar or identical strategies in different wrappers,” Cerulli said in the report. “As such, more firms over the next year are planning to replicate existing strategies than are planning to build out new strategies in vehicles such as CITs, SMAs, and ETFs.” 

Creating new investment vehicles is the highest priority for 69% of asset managers polled by Cerulli, outpacing last year’s 41%, according to the research.

“Asset managers can do well to cement relationships with large retirement plans by offering lower fees, which will often be needed as the plan fiduciaries fight to keep retirement assets for their participants,” says Matt Apkarian, an associate director with Cerulli. 

Mutual funds have lagged ETF, SMA, and CIT asset growth rates for years, Cerulli notes, a trend the consultancy expects to continue due to demand from retirement plan managers. At least 83% of asset managers are choosing to replicate strategies using CITs due to requests from plan advisers, consultants, or plan sponsors.

While interest in both SMAs and CITs within defined contribution plans has been rising, there are still implementation concerns from advisers and plan sponsors. That may be changing as the investment vehicles become more familiar. CITs are now on pace to overtake mutual funds as the most popular target-date vehicle for DC plans in the coming years, according to March research from data provider Morningstar. CITs make up 45% of total target-date strategy assets, up from 32% five years ago.

Cerulli warns that asset managers should be careful not to only replicate existing strategies in the vehicles, but to consider the best strategy for the client.

“Successful managers will find that they can safeguard against a declining mutual fund business, and also ultimately lead investors to find more value in financial services and better long-term investment options through customization and tax optimization,” Apkarian said.

The research found that asset managers’ second-highest priority was building out illiquid alternative investment options to meet the demand for greater diversification. The firm said 62% of those polled put the offering as a high priority