The 20 Rising Stars of Mutual Funds 2008 - (Page 6) Untraditional Thinking The mutual fund industry sees original product development, ETFs and global investments as the wave of the future By Mark Malyszko kasina, the challenge for the industry as a whole and for individual fund companies that want to stay ahead is original product creation. “They should develop more products,” he said. “The majority of asset managers are not developing new products.” Instead, most fund managers are launching products in existing categories. If, for example, a fund decides it is missing mid-cap value stocks and expands there as a result, all it is doing is launching a product that is already there. “You don’t just want to develop a lot of products,” he added. When fund companies go the route of competing based on what is working for others, they are left with performance as the deciding factor in competition. By itself, that does not give many funds enough of an edge, Miyao said. Thinking Outside the Box Creating something new, however, is tricky. The industry will find something that’s hot and go after it without being different because fund managers are caught up in traditional style boxes. “That’s exactly the problem firms are having,” Miyao says. “There’s always a hot product right now and that always changes.” As a result, many fund companies will develop many products every year that may not stand out. Some mutual funds, however, succeed in what Miyao called true innovation. He pointed to Vanguard’s low-cost index funds, which have been hailed for their 0.18% expense ratio. The Vanguard 500 Index Fund, which has $120 billion in net assets, is one of the largest mutual funds. Fund managers agreed. “Investment product churn also is likely to increase as the industry continues to launch specialized products whose shelf lives are limited to the popularity of the investing fad du jour,” said Zach Liggett, portfolio manager at Financial & Investment Management Group in Traverse City, Mich. “Hopefully, investment managementfocused—rather than marketing focused—boutique managers will continue to thrive in this environment by competing on a broader value proposition encompassing philosophy, process and people rather than solely on price.” JANUARY 2008 T HE MUTUAL FUND INDUSTRY is evolving. While traditional investments remain the most popular, industry observers and fund managers said the future for fund companies and investors is in less traditional investments. Investor concerns, volatile markets and regulatory pressures are changing the way portfolio managers look at how to best achieve returns for investors. These realities are resulting in more thinking going into the risk management of fund portfolios. As a result, longterm, low-cost investment strategies are getting more attention. Whether they are becoming more of a priority and whether it is soon enough is at the heart of a debate about the U.S. fund industry’s future. Observers said that, first and foremost, the industry needs to be open to new products and fund companies need to embrace different strategies, such as ones involving the non-traditional but expanding arena of exchange-traded funds (ETFs). According to Steven Miyao, CEO of consulting and research firm 6 MUTUAL FUND RISING STARS
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