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A Look Back at 2011

By Steven Miyao

It's that time of year again, when we look back at our predictions and see how accurate they were. In 2011, I hit 9 of 14. The main challenge in doing predictions is getting the precise timing right, so a number of our predictions from 2011 will pop up again in my forecast for next year. Below, we revisit our 2011 predictions and see what actually transpired.

1. Emerging markets growth continues to outstrip U.S. growth, and U.S. firms start to focus more heavily on international products and clients. We will not only see assets predominantly flow into these categories, but also largely new fund or ETF products come to market in these categories.

Outcome: Asset managers are certainly focused on capitalizing on the growth opportunities presented in emerging markets and internationally-focused funds. In 2011, almost one third of new funds and ETFs were created to focus on emerging markets or international equity strategies. In terms of YTD flows, EM strategies witnessed $19.3BN in inflows, while U.S. equity-focused strategies bled $62.2BN in outflows.

2. Markets will soar next year as corporate profits and the economy improve. Flows will gravitate back to equities from fixed income products as confidence in the economy continues to improve. Late-year concerns over whether governmental fiscal discipline is achievable could hinder the enthusiasm. Interestingly, Year 3 of presidential terms is generally the best year for equity returns.

Outcome: We were on point for the first half of the year: corporate profits improved and reached record levels, and markets surged. We were also right about confidence sagging because of the government’s lack of fiscal discipline, as evidenced by the acrimonious debt battles in Washington and the subsequent downgrading of US debt. But we did not predict that, beginning in the third quarter, European debt woes would have such an impact on markets.

3. M&A activity will increase as firms start to have more confidence in the economy. Foreign as well as domestic powerhouses will make strategic acquisitions to broaden their product offerings. Small to mid-size firms with entrenched brand names or specialized product expertise are attractive targets.

Outcome: M&A activity actually decreased, with total transaction size and average deal premium down. Transactions concentrated more heavily on mid-size asset managers, deals ranging from $500MM to $1000MM. Most transactions were based on strategy initiatives, with only 6 bankruptcy-based deals to date, compared to 18 in 2010. The slowdown in M&A activity was most likely the result of acquirers feeling that relatively high valuations are making acquisitions too risky. We anticipate M&A activity to increase next year.

4. ETFs continue to proliferate, grow and pick up one-third of all mutual fund and ETF flows; ETFs will finally start to gain traction on retirement platforms in a meaningful way. Another top 20 fund family will acquire or start rolling out ETF products.

Outcome: ETFs picked up a whopping 45.9% of total mutual fund and ETF flows. There is limited data available on ETFs in retirement platforms, but a growing (yet still small) number of 401K platforms are opening up to ETFs and we will likely see more in the next year.

5. By mid-year, positive flows into equities will exceed flows into bonds.

Outcome: Equity flows started the year in the positive, outpacing fixed income in the first quarter. But by mid-year, fixed income flows exceeded flows into equity.

6. Assets will continue to consolidate among the top ten fund families. Distributors will increasingly push for the roll-out of exclusive products (branded products only available through a specific distributor) with these preferred partners.

Outcome: While the concentration of assets in the top ten fund families stayed roughly the same in 2011, we continue to believe that consolidation is imminent. Recent announcements from MSSB (as well as likely announcements next year from competitors) will increase distributor revenue sharing and make it more difficult for mid-size asset managers to distribute through large distributors, where the majority of advisors and assets are.

7. National Accounts teams continue to become more prominent, as fewer platforms exist and advisors use fewer providers, and getting on the shelf becomes more vital. Firms will add to their National Accounts teams and will increase compensation for those teams.

Outcome: We were right on point. 96% of asset managers and insurance firms believe the importance of National Accounts teams is increasing. Advisors are using slightly more providers, but getting on the shelf is more vital because more advisors are taking their cues from the home office. National Accounts compensation also increased. 65% of firms are increasing their National Accounts budgets and 73% are boosting staffing.

8. Despite the fact that firms are trying to focus on profitability, most firms will not resist the temptation to staff back up with external wholesalers and ratchet compensation up to pre-recession levels.

Outcome: 81% of firms are planning to increase external wholesaling staff, but economic woes and weak flows have kept compensation relatively flat. Compensation is not quite at pre-recession levels.

9. Several firms invest significantly in segmentation to better differentiate their advisors. These firms will then use this segmentation to direct their wholesalers, website and marketing efforts.

Outcome: Many firms have invested heavily in segmentation to differentiate advisors based on lifetime value, but only a few leading firms have created segmentation strategies to differentiate advisors based on behavioral and interaction preferences. We continue to believe that firms will begin to realize that segmentation is a business necessity, one that enhances profitability and reduces distribution costs.

10. Asset managers will continue to expand their focus on RIAs. 50% of firms will segment coverage of RIAs by AUM. The trend in the industry is increasingly towards segmenting coverage of RIAs by AUM.

Outcome: Our most recent research on the RIA channel shows that 32% of firms with a dedicated team segment coverage by AUM. But 79% of firms target the small pool of mega RIAs, which each manage assets over $1 billion. We expect to see more firms begin to create low-cost strategies to cover the enormous pool of small RIAs, where valuable opportunities exist.

11. Firms look to lower marketing & distribution costs by increased use of the Web as a wholesaler, particularly for lower-AUM clients. A number of firms will set specific website sales goals for advisors who are not covered by a wholesaler.

Outcome: An increasing number of firms are indeed focusing on designing Web strategies with the goal of selling and servicing advisors who are not covered by a wholesaler. We will likely see continued developments in this area in 2012.

12. Social media will continue to become more relevant to engage with investors, advisors, and institutional clients. Over 50 investment management firms will be on twitter next year.

Outcome: This has certainly been the case. Our latest count puts the number of investment management and insurance companies on twitter at exactly 50. Leading firms are integrating their social media efforts with the Web using a live twitter stream.

13. Mobile efforts will expand greatly; apps start to attain dominance over site optimization for Web. Ultimately, there will be competition in the apps space and "app overload", but not short term. We will see enhanced mobile support beyond the mWholesaler platform. Over 35% of firms will roll out tablets to their wholesalers.

Outcome: Many of the large firms have rolled out tablets to their wholesalers. Mobile efforts are expanding with some firms developing apps, but app development is still in its infancy. We are already beginning to see enhanced mobile support beyond the mWholesaler platform. JPMorgan has developed an enterprise app for wholesalers and a number of firms are currently in the developmental stages. Expect to see continued mobile efforts in 2012.

14. We will see many firms make the investment in more intelligent tracking/analytics to better understand their Web traffic.

Outcome: There has been more talk than action on this front. Some leading firms have integrated key systems like CRM, CMS, and Web usage, but most firms are still dragging their heels and putting off the investment until the future.