A new report finds “substantial” demand for CITs, alongside a growing interest in fund classes with no revenue sharing.
A new report by Sway Research finds that, asked to rate the demand and need for an array of retirement-specific mutual fund share classes, most asset management firms now feel that shares with 100 and 75 basis point 12b-1 fees are no longer needed, while the need for 50 basis point shares is fading fast. The only share classes that a majority of DCIO executives agree are both needed and making a significant impact on DCIO sales are those with no 12b-1 fee, and the share class with the greatest need and impact on sales also has no revenue sharing (i.e., sub T/A fee).
The report explains that DCIO sales generated via zero-revenue mutual funds (i.e., those that do not pay revenue sharing to distributors from fund fees) spiked this year, as did sales generated via Collective Investment Trusts (which, Sway notes, are “typically” zero-revenue vehicles) – trends that Sway notes are visible across all four of the manager segments (based on DCIO AUM and investment) they analyzed.
CIT ‘Sweet’?
On the CIT front, half of DCIOs surveyed say demand for CITs is growing across plans of all sizes. Sway says it has seen “substantial” demand for CITs in plans with more than $500 million of assets, but they are seeing the greatest rise in demand for CITs in the $100M to $500M segment, according to “The State of DCIO Distribution: 2020—Key Benchmarks, Developing Trends, Winners and Outlook.”
That said, the report cautions that this growth in demand for CITs presents challenges to asset management executives, including educating plan sponsors on those options. Another big challenge: to avoid cannibalizing more profitable mutual fund business. In fact, more than one in five DCIO sales executives surveyed are concerned that offering lower-fee CITs will speed the erosion they are already seeing in profit margins, according to the report.
The report notes that one possible solution to this pressure is to create CITs with minimum investments to ensure the asset manager will receive an ample investment of assets (and revenue) in return for the (generally) lower-fee CITs. It’s an approach already in vogue, apparently; about four in five managers surveyed currently offer CITs with minimum investments, and only about a third of firms surveyed offer CITs with no minimums, according to the report.
AUA Surge
Despite those pressures the report finds that Defined Contribution Investment-Only (DCIO) assets are surging, and those assets under management could grow by 15% this year. The surge comes after a rough end to 2018 – the result of falling stock prices – and, following a rebound in the first half of 2019, are on track to break $4.4 trillion by the end of 2019, according to Sway. Over the 12-month stretch from mid-year 2018 to mid-year 2019, the average asset manager surveyed by the firm saw its DCIO assets grow by more than 6%, as 85% of firms experienced a rise in DCIO AUM.
Sway estimates DCIO assets will make up 51% of the total DC market at year-end 2019 and will reach 54% by the end of 2023. The firm’s model shows assets in proprietary recordkeeper products falling to 39% market share this year and 36% in 2023, according to Sway’s latest research study. The report is based on surveys and interviews of DCIO sales leaders and DC plan intermediaries.
On a more subdued note, half the managers surveyed by Sway experienced net redemptions of DCIO assets in the first half of 2019 and in 2018 – an improvement from 2017, when 60% were in net outflows – and the level of net outflows is declining. Managers in Sway’s Tier 1B segment, which manage an average of $59 billion of DCIO AUM, averaged DCIO net outflows of $1.4 billion in the first half of 2018, but this shrank to less than $300 million in the first six months of 2019, according to the report.
At the same time, first-half 2019 DCIO gross sales for the average Tier 1B manager were 53% of the full-year 2018 figure, suggesting these managers are on track for stronger full-year 2019 effort, according to Shay. The report explains that managers have had a lot of challenges to adapt to in recent years, including intense downward pressure on fees and the subsequent rise of passive management, as well as the proliferation of target-date solutions.
In response, firms have made changes to product lines – fee cuts, zero-revenue pricing, collective trusts, etc. – and sales efforts, greater emphasis on retention, enhanced coverage of aggregators and model-builders, investment in sales analytics, and so on. According to Shay, these moves are beginning to pay off.
