Blog > Fund Marketing is Your Only Value Add
Narrative, not performance, is the deciding factor for inflows
In late 2021, Morningstar found fund closures were rising fast.
They found both the number of funds closed and the ratio of funds closed to new launches hit a 15-year high in 2020. They also found nearly half of closed funds don’t even make it to their 5th birthday.
Performance isn’t the main problem. About 12% of all closed funds landed in the best performing quintile of their respective category. Only 39% were in the bottom quintile.
Two things stand out about the funds that get liquidated or merged into other products: One, they’re more likely to have higher fees. Two, they’re small.
Meaning, the biggest problem for most of these funds is marketing. If clients won’t invest in a good proposition, it’s because they don’t see it as one.
This remains true even if a manager chooses to depend entirely on distribution and client meetings. A “sales” meeting is just another form of marketing. However way the story gets told to clients, it still needs to be right.
Performance data isn’t enough. Informing clients of the sticker price also isn’t enough. Clients need to understand the product:
A study of strategy descriptions in fund prospectuses showed greenwashing funds attract similar flows as funds that are truly committed to ESG, suggesting investors can’t tell the difference.
Their definition of greenwashing was fair: funds that are in the top 5% in how much they talk about ESG, but that their ESG holdings are below the median.
No question, funds that talked more about ESG had more flows. Strikingly, the effect was more pronounced for flows coming from institutional investors.
Astonishingly, investors tend to direct their flows to funds that talk about investing in ESG, regardless of whether these funds actually invest in ESG stocks.
This is not fund-management advice! But it does show investors, including professional ones, rely on storytelling to understand propositions.
When a buyer meets a seller, one of them takes almost all of the risk – usually it’s the buyer. The seller can choose to ignore this fact, but the clever ones don’t:
Instead, they take away some of the risk.
Immediately, you’re thinking of a win-loss situation, like offering goods for free. But there’re more creative options.
After all, the investment industry has one of the worst industries in terms of the risk profile it offers clients. It’s legally prohibited from promising returns. It also involves big money decisions. The only reason anyone ever buys is because…what’s the alternative?
Content is a clever way of reducing risk for buyers. Take note: this isn’t about your fund manager writing yet another blog post about inflation.
Instead, think about thematic funds as an example:
Yes, a provider cannot guarantee a theme will forever perform well (none do). But it can teach the client about a segment of the real economy, which they probably don’t know very well. If clients feel informed, they come to adopt the provider’s view on the theme. They buy into it, in every sense of the word.
What you’ve given clients in this case is not “information”.
You’ve given your clients conviction. Through your content, clients gained an internal belief that they’re doing the right thing. Self-conviction is an important way of reducing perceived risk for a fund buyer.
“The purpose of business is to create and keep a customer”, said Peter Drucker, the very same person who coined the term “knowledge worker”.
And to do so, he said, a business has just two levers: marketing and innovation. Everything else is an expense.
This couldn’t be truer for a fund management business. An asset manager isn’t going to become more profitable by shrinking its IT teams or trimming their printing expenses by 10%.
But an asset manager can become more profitable by adding value to clients. Again! Adding value isn’t necessarily about adding a couple of extra basis points to performance. Here’s Broadridge saying as much in their 2022 Asset Management review:
Too many asset managers compete in a similar fashion within a wholesale distribution model that increasingly positions their brands further away from end users.
In reality, however, changes in the environment are creating a number of unmet needs, all of which are opportunities for a subset of asset managers to innovate and reposition themselves for growth.
Above all, content needs to be purposeful. It there to do something:
And if marketing is your only value-add, the responsibility lies with you to make sure it’s changing how clients see the world.