Who will invent the iFund?

This essay appeared in Citywire Selector on October 14, 2011. 

 

Steve Jobs was the greatest aggregator of applied ideas in our time.

Great innovator, yeah sure, that too. But what strikes me was his ability to take multiple things, somehow related but seemingly disparate, and combine them into something new.

That ‘something new’ offers more in aggregate than the individual parts of which it was made. He was a master of the go-between, erasing boundaries and knocking down walls. Think iPhone, think iPad.

If you have not already done so, take another look at the launch announcement for the original iPhone. Jobs, with a tremendous enthusiasm reminiscent of a child on Christmas morning, explains to a packed auditorium that this new device is a phone and a web browser and an iPod.

The crowd, at least initially, does not get it. Are they dumbfounded or is it just taking some time to settle in? He pauses, stunned that people don’t get it.

He repeats himself, with even more enthusiasm, giddy with the magnitude of the idea – he of course already knows what this means. ‘It is a phone AND a web browser AND email and…’

Finally the crowd claps and lets out a muted cheer. Are you reading this on an i-Device? Now we know.

Our industry finds itself with parts that have the potential for reassembling and in many cases, disassembling! Simplify, simplify, simplify.*

For all of the things we can discuss as drivers of Steve Jobs’ success, his refined simplicity is perhaps the most underestimated of them.

During a period of time when the number and complexity of technology products grew exponentially, Steve Jobs understood the importance of doing a few things very well and sticking to them.

He recognised too that it’s not only about designing and creating great products. It’s also about putting oneself into the shoes of the consumer and understanding their experience. The selection and buying process is really important.

Enter the glass Apple store on 5th Avenue in New York and you know the buyer’s optimal experience is well understood. Sales people are not only informed about the products, they are coolly enthusiastic about their task of selling them.

The spark of Steve comes through in their passion for the products and the company. Equipped with modified iPhones, they can transact directly from anywhere in the store – no need to stand in a queue to pay. ‘Would you like me to email your receipt to you?’ ‘Email the receipt?’ you think to yourself – hey, yeah that’s great, thanks.

Apple is an extraordinary company in every way. Whether you go into a store, look at their website or speak with someone on the telephone, the buying experience and post-purchase support is excellent and consistently so. It is built around the client.

For comparison’s sake, take a couple of minutes and look at the Dell website. What does Dell stand for? What do they do well? What is clear is that they are behind the curve. They are in a hypercompetitive market and they are selling a highly commoditized product. They are playing in a space where price is the prime motivator.

The folks at Dell have followed the ‘super store’ model – their business is all about choices – the more the better. Throw some stuff against a wall and something will stick.

On the opening launch page, you have the choice of buying cameras, desktops, TVs, printers & ink. Want to buy a laptop from Dell? Ok, you have some choices to make: how big, how much do you want to spend, how fast, how heavy, what color? There are four different base models and then several from other brands. You can even take an online PC health check – the choices are overwhelming. Focus, Mr. Dell, focus, focus.

Much of my ‘general’ research (research I am not doing directly for my clients) is focused on how and why humans make choices. What we know from recent studies is that there is a point at which general consumers become overwhelmed by the number of choices available and simply turn away – their choice ultimately is not to choose at all.

We grow wary of being inundated with unneeded fluff, canned comparisons and shiny advertising (sound familiar, fund selection colleagues?).

Professional buyers of investment products are some of the most discerning buyers around but they share important common threads.
Sharp focus

Ask a room full of selectors about the general characteristics they prefer in an asset manager and they will overwhelmingly answer with: focused in just a couple of areas, high levels of conviction and commitment from the portfolio manager.

They want to ‘feel’ the personality of the portfolio manager and know that he/she is deeply engaged in making portfolio decisions. They want to choose someone who is decisive and focused. Further, buyers increasingly seek managers that understand their own investment process and what is needed to support them. Take a popular example: Carmignac. Either consciously or not, the firm has done precisely this.

Mr. Carmignac has created the right product for the right time for sure. The main fund is the all-in-one, an aggregator of varying ideas that has the flexibility to move when the markets warrant.

But beyond the product, he has created the right investment experience for professional buyers. He has provided much wanted transparency and access. He has provided information in a timely fashion (weekly updates) and in a format that is easily accessible – much of the information available on their site. Professional buyers in turn have become strong advocates – supporting the enterprise with a steady stream of inflows.**

Consider DWS Investments. A highly respected organisation, it has a long and complex history. Like other asset management companies of similar scope, it must move a very large ship to stay innovative and engaged with clients – things can have the tendency to fall between the cracks.

Their website, for instance, is very handsome and well-designed but does it address me as a professional buyer? Do I get the information and insights I need from it?
Communicating your message

What strikes me is that it seems to have been forgotten (at least momentarily) as a central source of information. Take a look at the most recent market update posted on the launch page of their site written by their CIO. As of the posting of this article, it was written on August 17, 2011 – a lot has happened since then.

Asoka Wöhrmann (DWS’s CIO) is a very smart gentleman and someone I find to be a particularly thoughtful investor – as an investor in the funds under his purview, I would like to have some more recent insights from him.

More to the point, if this is what we see on the launch page of their site, what should we expect for information available on the nearly 500 funds managed globally by the firm? How current is the data available on them? How much conviction would we find in the belly of the manager of fund 453 on the list?
Don’t overwhelm

The complexity of managing such a large assortment of products can be an overwhelming challenge. It can also be overwhelming for the professional buyer trying to discern the exceptional from the mediocre within a particular organisation.

Certainly DWS excels in several investment strategies around the globe but not nearly in the number represented by all of those funds! In some cases, there are several strategies with minimal differences targeting the same investment opportunities.

As a professional buyer, when confronted with a product that is difficult to differentiate from its peers, my tendency is increasingly to simply walk away.

Many asset management firms struggle with the legacy of product proliferation. Alliance Bernstein is another example of a firm that would be well served to apply some pruning to a long tail of small funds and sub-advised products.

BlackRock sure has a lot of products, Henderson… Certainly having a broad palette of products provides for diversification across business lines and funds ‘in wait’ to promote as markets evolve. But an asset manager can’t be good at everything – you have to pick your spots.

In many asset management companies of significant age or asset size, there tends to be a narrow handful of funds with high asset concentration and then a range of funds of more modest size. Quite often, there is a long tail of legacy products just staying warm on the shelf. They often have very low asset bases and mediocre (at best) prospects for the future.

Given the resources demanded, this non-core group of legacy products presents a kind of ‘tail risk’ to the asset management companies. They can undermine the strength and balance of the organisation.

Interestingly, the on-going trend towards multi-asset/multi-strategy funds – best identified as ‘smart phones’ in our comparison – demands the ability to first isolate best ideas and in turn aggregate them intelligently.

Simplify. Focus. Asset managers who are able to do so find themselves in substantially better positions to produce alpha, manage their complex businesses and ensure that best thinking is reaching buyers of their products. One of these firms will invent the iPhund 5.

* Henry David Thoreau
**But we must be balanced in our assessment; this is a dangerous time for the firm. Expectations are high and there is significant concentration of risks (of multiple types) ‘key man’ not the least of them.