Changes in the way financial planners build their clients’ portfolios – with the end goal in mind – are presenting funds managers with new challenges in their product development strategies.

The latest report from Cerulli Associates, the Boston-based funds management research firm, says funds managers must consider whether they want to operate as a building block of a portfolio, deferring 100 per cent of allocation decisions to the portfolio constructor, develop products with embedded advice, or straddle both. “Acting in this multi-dimensional capacity poses a challenge for marketers as they seek to establish brand recognition and convey the brand’s attributes,” the report – Cerulli Edge, US Asset Management – says. “As product developers conceptualise and design the next iteration of retail investment product solutions, Cerulli counsels asset managers to define their strategies in the context of what role they play in investors’ overall portfolio construction… “When operating as a building block, asset managers must approach product development and positioning with the end in mind. While it will remain important for them to convey attributes such as their integrity and solid investment performance, they must also communicate how a particular product fits into an investors overall portfolio and help advisers more effectively construct portfolios that meet a desired outcome.” The building blocks which a funds manager markets can be either the core of a portfolio or satellite product. Cerulli points out that the traditional Morningstar nine style boxes, popular with advisers for years, are being replaced as a portfolio construction tool with a new framework consisting of alpha-generating investments, alternatives and a tactical or thematic component. The report includes two case studies – the introduction of 130:30 funds into a retail client’s portfolio and the recent launch by Janus Investments of a ‘modular portfolio construction’ tool. With 130:30 funds, Cerulli says, the manager has to decide whether to market these as core or satellite products and to teach advisers to employ them. This is being debated within the industry still because the funds are relatively new but increasingly popular with institutional investors. The Janus portfolio construction tool, which is designed for the less sophisticated end of the adviser spectrum, helps Janus make its mark in the industry in an area where it leverages its investment expertise without going head to head with its competition in an already crowded arena, such as retirement income, Cerulli says.

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