Is The Time Of 'Plain-Vanilla' Funds Over?

by: Lipper Insight at Thomson Reuters

By Detlef Glow

If one looks at the investment objectives of newly launched mutual funds, it becomes obvious that more and more fund managers have extended their investment universe or increased the flexibility of their funds. Surprisingly, this happens not only in mixed-/multi-asset products and bond funds but also in the equity space, where fund managers nowadays have the ability to take short positions and/or to invest outside their focus markets.

Even in the exchange-traded fund (ETF) space-where transparency is one of the key attributes, we see more and more so-called smart-beta funds issued by fund promoters, adding to an already crowded space.

Don't get me wrong here; I don't want to say that new and innovative products are bad for investors or the market as a whole. But the new levels of complexity make it harder for all market participants to understand exactly what these funds are doing. Investors may have problems understanding in detail how such funds react in different market environments and might therefore have wrong expectations for these products. Meanwhile, data vendors might not be able to classify these funds appropriately, since the funds all have little tweaks in their investment objectives that can make a big difference in performance during some market conditions.

In addition, funds with extended investment objectives are much harder to evaluate from a qualitative perspective, since, for example, a short position needs to be managed very differently compared to a long position. This means the manager would need to have a totally different skill set and the management company would need to have risk management systems in place to properly evaluate the risk of short positions.

In light of this, private investors may need the help of a qualified advisor to make an educated decision about which fund they should use in their portfolio. In a market environment such as Europe where the number of advisors serving retail clients is shrinking, it might become harder for the average investor to find the advice needed to build a portfolio that suits a particular risk profile and investment need.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.