Structured products will overtake exchange-traded funds in market share over the next several years. The latest research study by Financial Research Corp. called "Caught Between Alpha & Beta: The Future Of Retail Portfolio Construction" finds that structured products will increase their market share from 5.3% at the end of 2007 to 7.5% by 2012, while ETFs will have 6.8% of the market by 2012. "Structured products represent a wide variety of customized investment vehicles and a growing number of advisors are using them to provide principal protection to their retiree and baby boomer clients while still giving them market exposure," said Kristin Adamonis, senior editor.
Other findings in the report include:
* Actively managed open-end funds market share will drop from 61.1% to 55.1%
* Separately-managed accounts will grow from 9.2% to 10.7%
* Index open-end funds will drop from 6.6% to 6.1%
Adamonis said that ETFs will gain increasing prominence as the investment of choice to gain equities exposure, especially in the U.S. large-cap sector. Only 39% of advisors said mutual funds were the best vehicle for their large-cap core holdings. Advisors are also turning away from fixed-income funds--only 33% prefer funds for tax-free fixed-income and 32% for taxable fixed-income.
Smaller fund firms can position themselves as niche managers who concentrate on special asset classes. For example, advisors still prefer mutual funds for exposure to international equities. "People still believe you can capitalize on active management to get the best returns in this space," said Adamonis.
Another area where mutual funds can gain traction is in the long-short space. Of 18 fund firms surveyed, all had launched, filed or were considering 130/30 funds. Adamonis said the switch from long-only offerings to an offering that use short positions will open up pieces of portfolios that mutual funds would not have had access to in the past. The key is for firms to educate advisors about 130/30 funds so that they become comfortable with them, she said.
Research for the study was completed in the third quarter and Adamonis said while some of the actual asset figure projections may change because of the global financial crisis, the market share relationships and direction in which offerings usage is moving will continue as outlined in the study.
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