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A Look Back at 2010

By Steven Miyao

A year ago we took a run at predictions for 2010. I will briefly review our predictions.

Recap of 2010 - How right were we last year?

Industry trends:
1. Bond flows continue to dominate (>70% of flows) early in the year. Flows into equities dominate (>70% of total) the 2nd half of the year, after definitive data says the economy is improving. Continuing a long-standing trend, investor flows follow performance. Strong equity flows replace bond flows after the stock market surges and after interest rates start to rise and bond prices fall.
Conclusion: Half right, half wrong

Bonds flows dominated throughout the year.

Equity market surged, fell, and surged again.
Source: Yahoo Finance

Interest rates went lower still.
Source: SmartMoney.com yield comparison tool

Bond prices continued to rise.

Through November, flows into bond funds amounted to $245B (of a total of $250B of long-term flows). Even PIMCO's Total Return had its first month of outflows since November 2008. We'll take credit for being partially right on this one.

2. Net flows continue to go predominantly to low fee shops, as the miniscule total returns of the past 10 years magnify the importance of fees. Those shops without low fees only draw net flows if their products are truly differentiated.

Source: Morningstar

Result: We were right, as Vanguard and PIMCO dominated flows.

3. From a trough of 18% in the 1st quarter of 2009, gross profit margins for firms climb back above 30% again (2008 margins were 30% for publicly traded asset managers). The ultimate winners will be those who maintain their focus and fiscal discipline even after assets recover, setting themselves up for sustained, intelligent growth.

Result: Operating margins are back in the high 20's, not quite to 30%. TRowe, Calamos, Gamco, Pzena all stay ahead of the pack, with operating margins over 35%, driven by focused growth and disciplined expense management.

Source: kasina

Strategy & product:
4. M&A picks up, in number if not in dollar terms. Firms have shored up balance sheets. Those in the best financial shape look to acquire, in order to expand international presence, shore up product gaps, bring on an attractive brand name, and gain scale. Small-to mid-size firms with entrenched brand names or specialized product expertise are attractive targets. While we don't expect to see deals of the size of Merrill/B of A, expect to see a handful of mid-size household names change hands.
Result: We have not seen much of a pickup yet. Due to the sluggish recovery, potential acquirers are being cautious with their cash.

5. Guaranteed income products become hot, both in and out of retirement plans (albeit hotter in retirement plans than outside). Limiting downside risk in portfolios continues as a focus for retail and institutional investors.
Result: More talk than action still. Alternatives such as absolute return products seem to be off of the black list, but traditional guaranteed income products are not capturing drastically increased flows yet.

6. ETFs continue to proliferate and gain market share. Advisors continue to gravitate clients from open-end funds to ETFs as advisors understand how to optimize usage of ETFs and firms continue plug product lineup holes with all possible flavors of ETFs.
Result: We got this one right. And, this trend is likely to continue for the next few years, as ETFs pick up market share from funds.

Distribution:
7. Compensation of wholesalers continues to recover. Average total compensation for external wholesalers, which was $372,000 in 2007 and dropped to $295,000 in 2008, fully recovers to 2007 levels. While an ample supply of talent looking for work should suppress wages, firms' healthier financial positions, their desire to take care of their best performers, and renewed positive net flows put upward pressure on total compensation.
Result: Actually, firms have been fairly cautious with compensation. External Wholesaler compensation, for example, is forecasted to stay flat from 2009 to 2010.

8. Ten of the top 20 firms in assets have hybrid wholesalers by the end of 2010. The cost-effectiveness of hybrids is being proven by the early adopters. Additionally, advisors indicate more willingness to deal remotely and less time to meet face-to-face, both of which point towards' internals and hybrids gaining in importance.
Result: There continues to be slow adoption of hybrids. By our count, eight of the top 20 firms currently employ hybrids. As to the second point in our prediction, advisor data continues to indicate a growing preference for online and remote support. Therefore, internals and hybrids will continue to be effective in serving these advisors, as will online marketing and support.

9. Firms continue to leverage technology by experimenting with video, audio, and web conferencing capabilities to deliver 1-to-1 (wholesaler-to-advisor) and 1-to-many (interactive Q&A with in-house experts) interactions.
Result: Yes on the video and audio fronts, but we haven't heard much regarding conferencing yet.

e-Business:
10. Social media becomes mainstream in financial services, but firms' levels of commitment are varied, some diving in with both feet, some much more cautiously. Progressive firms experiment with different media in both B-to-B and B-to-C arenas. By year-end, 18 of the top 20 firms in assets have dedicated pieces of their budgets to social media.
Result: We have seen an increase in firms who claim to have a social media strategy and who are dedicating resources to social media.

11. Firms begin to move away from considering their Web sites as the central repository of content and towards supporting broader distributed content (e.g. SlideShare, Scribd). As print costs skyrocket, advisor only content becomes passe, and people are free to distribute content anyway, firms will decide to make this as easy as possible by making their content portable and omnipresent. One major firm takes the leap, and spends as much on managing and facilitating data and content in the "distributed arena" as they do on their own Web site.
Result: Both mobile technology and social media are driving firms to release their hold on content.

All in all, it was a mixed bag for us-some right, some wrong. But the fun is in the prediction, discussion, and (re)evaluation.

Upon reflection, the most significant happenings we saw in 2010 included the following:

Industry trends:

• Markets stabilizing. Equities posted a gain but unemployment still remains high. Asset management companies are also dealing with pressures to reduce costs.


• 12b-1 fee proposals. Lots of possible change from regulators, not much came to fruition yet.


• An undercurrent of fiduciary sentiment pulling towards a clear standard.

Strategy & product:

• ETFs gaining huge momentum.


• The beginning of a large transition to retirement income.


• Asset managers are trying to survive and be cautious on their budgets.

Distribution:

• Refinement of compensation models to better match firm profitability.


• Increase in importance of targeting and measuring sales and marketing strategies.


• Segmentation is starting to be taken seriously-sales is developing more respect for data/analytics (it's not just about relationships).

e-Business:

• Increased buzz and action around mobile technologies and smartphone user interfaces.


• Firms are getting a lot more serious about technology and promoting their point of view through their Web site/blogs, etc.


• Social media and shareability of content continue to proliferate.