How often have you heard a product being advertised as ‘new and improved’? It can’t be both and is often improved rather than new – in other words, certainly not innovative.
Definition
In our industry right now, professional investors are clamouring for something innovative, something brand new, something different from what is currently on offer to take the pressure off investing in increasingly correlated (and unpredictable) asset classes available today.
The importance of innovation in asset management was highlighted in an Ernst & Young report produced at the end of last year that said: “Every entrepreneur knows that innovation and growth are linked, and that in mainstream businesses competing to maintain market share against cloned services, the mantra is ‘innovate or die’.”
The problem comes with the definition of what is ‘innovative’ as, arguably, the last really genuine innovation was Harry Markowitz and the efficient frontier espoused in his modern portfolio theory. That was in 1952.
Or are, for example, exchange-traded funds a more recent innovation?
Ernst & Young found that the definition of ‘innovation’ is incredibly subjective, with a tweak to an existing product, for example, being seen as being innovative when others would see that as nothing more than progressive development of an existing product.
“Almost all asset managers considered the creation of new products as innovation”, the report says.
Difference
Glenn Williamson is head of investment trusts and UK product at Fidelity. When asked what Fidelity does that is genuinely innovative, he described the Fidelity Moneybuilder Income Reduced Duration Fund launched in January this year.
The difference between it and Ian Spreadbury’s £3bn Fidelity Moneybuilder Fund is that it uses a derivative overlay strategy to reduce the portfolio’s duration risk to around two years.
This fund was produced following conversations with professional investors who were worried about their exposure to corporate bonds and the possibility of interest rates rising and capital values falling.
Similar conversations in the not-too-distant past have resulted in the introduction of, say, high yield bond and emerging market debt funds, both highly successful products with investors. But are they examples of genuine innovation or just product development?
James Rainbow, head of UK marketing at Schroders, splits innovation into new investment capabilities (both product and service) and technology-based solutions. He argues that product providers are good at responding to new areas of investment, giving the examples of multi-asset propositions and the introduction of institutionally-based products and pricing into the retail space.
Distribution
In a recent article for the Financial Times, Schroders’ global head of distribution, Massimo Tosato, cited a brand new product, launched after three years of research, with a 20-year time horizon that combines accumulation in the early years followed by decumulation – something genuinely innovative as an asset management product offering meeting an identified customer need.
Its importance was noted by Ernst & Young, saying in its report that demographic shifts – for example the move from defined benefit to defined contribution pensions or the need for decumulation to service ageing populations – would be “the primary driver” of innovation for asset managers.
Where Rainbow hits the nail squarely on the head is with his views on technology.
“It touches how people interact with you and the growth of platforms changed all that. People clearly want to find out what you do and they have a hunger for information, both at work and in their world as a consumer. What technology is doing is putting people closer to the portfolio-building and investment selection decisions.”
Development
Technological developments and their application will continue to provide innovative solutions and services that we cannot even contemplate today. In terms of products, however, we are nearer to the tweaking of fund ranges rather than anything more innovative.
For me, Gary Reynolds, chief investment officer at Courtiers, summed it up when he said: “There is not a lot that we [the industry] do that is innovative. What we are good at is using what was innovative and then applying it in different ways.”
Looking at this question of innovation in a more playful way, Reynolds asked: "Are there any super powers that superheroes haven’t already got?"
If you can think of one, please do tell, but as with combining Batman and Superman in what will probably be 2015’s blockbuster summer movie, most asset managers are working on what they think is ‘improved’ when its customers want ‘new’.
What would you say is genuinely innnovative? Share your thoughts in the Comment box below.
