Investors' wariness of equities is prompting some mutual fund companies to expand their menu of offerings to include more bonds and alternative investments
Investors' wariness of equities is prompting some mutual fund companies to expand their menu of offerings to include more bonds and alternative investments.
From January 2008 through June, investors took $135.7 billion more out of equity funds than they put in, while a net $729 billion has poured into fixed-income funds and $41.7 billion into alternative-investment funds, which aim to provide returns not correlated to those of the equity markets.
“Fund companies are going to pick up additional flows wherever they can,” said Greg Warren, a stock fund analyst at Morningstar Inc. “Sure, we all know that money will start flowing out of fixed income at some point, but with some players like Legg Mason [Inc.] struggling, firms can take market share away from them.”
And large fund companies, such as AllianceBernstein LP, DWS Investments and Putnam Investments — all of which have traditionally been known as equity players — have been launching fixed-income and alternatives funds, and revamping existing products, in an effort to redefine themselves.
“The days of being a pure equity player for large firms are over,” said David Steyn, chief operating officer of AllianceBernstein.
RETHINKING EQUITIES
The trick for advisers is to figure out which fund companies are going to do an about-face when tides turn again, and which are really in the midst of a long-term shift in strategy.
“The danger is that some of these firms are coming up with things that they aren't good at or that people don't have the right expectations for,” said Russel Kinnel, director of research at Morningstar. “Advisers should always have a fair amount of skepticism about firms' trying to do something new.”
Mr. Kinnel noted that while AllianceBernstein traditionally has been known as an equity player, it always has had fixed-income expertise, as well.
In 2007, the firm realized that its business was too concentrated in equities, Mr. Steyn said. At that time, only 23% of the firm's business was in fixed income.
AllianceBernstein began moving more toward fixed income because it saw institutional clients asking for it. “Our strategic push into fixed income was in no way anticipating 2008,” Mr. Steyn said.
Since early 2009, AllianceBernstein has launched 38 funds — almost half of which are fixed-income funds.
Today, 44% of the firm's assets are in fixed income.
As part of its effort to diversify its revenue model, AllianceBernstein over the past two years has been expanding its alternatives business. In August, the firm launched a global market-neutral fund for retail investors. In October, AllianceBernstein announced that it was buying an alternative-investment group from SunAmerica Inc.
“I could see us doing opportunistically one or two more acquisitions, where we fill capabilities which we think clients want and that we don't have the internal resources to do ourselves,” Mr. Steyn said.
The firm has $13 billion in alternative investments, up from about $4 billion two years ago, he said.
EMPHASIZING EXPERTISE
DWS Investments, the U.S. asset management division of Deutsche Bank AG, is another firm that is redefining itself to emphasize its expertise in fixed-income management. After Deutsche Bank bought Scudder Investments in 2002, the latter got entangled in the mutual fund market-timing scandal.
In 2008, the firm re-branded from DWS Scudder to DWS, but advisers still didn't really know what it excelled at, said Michael J. Woods, managing director and U.S. regional head for DWS Investments Distributors Inc. One of the problems, he said, was that DWS had inherited a number of firms, such as Scudder and the asset management arms of Alex. Brown & Sons Inc. and Bankers Trust Corp., and wasn't known for one particular thing.
“For the past two years, we have focused on what we do best,” Mr. Woods said.
The firm has been busy changing its fixed-income lineup. In April, DWS changed its DWS Short Duration Fund to the DWS Ultra-Short Duration Fund.
The firm also is tweaking its DWS Strategic Income Fund to become an unconstrained bond fund. The fund will be relaunched as the DWS Unconstrained Income Fund by the end of this month, Mr. Woods said.
DWS also is dipping its toe into alternatives. Over a year ago, the firm tweaked its commodities fund, now called the DWS Enhanced Commodity Strategy Fund, to enable it to do well in different market environments, said Douglas Beck, head of product management.
So far, DWS seems to be reaping the rewards of its efforts. Year-to-date as of June 30, the firm had seen a positive net flow into its fund group, which, if the firm stays on track, will make 2011 the first time in 13 years that DWS has seen positive net flows.
AN ABOUT-FACE
Putnam Investments may be the most talked-about in industry circles when people mention a traditional equity player that has done an about-face.
To improve performance of its equity funds, Putnam has changed managers, adopted performance-based-fee incentives for portfolio managers and cut fees. But it also has launched new funds for retail clients — most notably its absolute-return series of funds. As of June 30, the funds — which were launched in January 2009 — had $3.7 billion in assets.
Robert Reynolds, chief executive of Putnam, believes that absolute-return funds will continue to be popular even when the equity markets come back.
“If I could generate the same returns as the equity market on a consistent basis for half to one-third of the volatility, then that would be a good thing to have in my portfolio,” Mr. Reynolds said.
But whether any of these firms are going to stick to their new strategies or rush back to equities when things turn around remains to be seen, said Geoff Bobroff, a mutual fund consultant.
“It may or may not be a passing fancy,” he said. “But advisers need to make sure that the pony they select for clients to ride on is one that has durability and stability.”
