Large money managers are facing threats to growing their business in the ever-expanding defined contribution market.
These large firms already are losing market share among defined benefit plans, endowments and foundations. Now, despite taking an early lead as providers of target-date funds and other traditional DC investment options, large money managers face challenges from smaller, niche players as investors seek more alternatives, unbundled fund options and customized target-date funds with multiple managers.
Customized target-date funds would favor smaller managers that can add value to portfolios, said Benjamin Phillips, Darien, Conn.-based partner at Casey, Quirk & Associates. He added that innovative, packaged target-date funds could include alternatives such as private-equity-like investments, real assets and real estate.
“It's an equally rough-and-tumble situation in defined contribution (as in defined benefit and endowments and foundations) because of the quest for new innovative products,” Mr. Phillips said.
But there still are hurdles for alternative managers to increase their presence in the DC world including the challenges of calculating daily valuations and providing accounting transparency, Mr. Phillips said. However, managers with funds of funds should see more opportunities as those strategies can likely get over any liquidity hurdles.
Large managers could cut into the share of alternative managers with replication strategies, such as for hedge funds, but those strategies are pretty experimental right now in the DC world, Mr. Phillips said.
The next three to five years will really focus on product development and differentiation and “moving away from anything that looks like closet beta,” Mr. Phillips said.
As other traditional asset classes such as large-cap core equity are in “remission,” managers need to adapt to survive and expand globally with products that shift to different markets, said John Siciliano, New York-based managing director at PricewaterhouseCoopers Consulting.
“If you are below the top 20 managers today, (with total AUM of) about $300 billion to $400 billion, you're going to have some real survival challenges,” as global assets are still hovering around pre-crisis levels and fees are down, Mr. Siciliano said.
It's an issue that is already evident in the defined benefit, foundations and endowments world.