Innovation: initial steps for fund industry players

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Recent studies continue to reinforce the empirical evidence of the positive impact of innovation on company performance. According to these studies, those companies that are committed to innovation will grow three times faster over the next five years. Companies that do not commit to innovation will tend to disappear.


In 1958, the 500 largest companies in the United States listed on the S&P500 remained in that index an average of 61 years. Today that period of permanence falls around 18 years, but the forecast for 2025 is close to 15 years. That means that no matter the size, even the largest companies in the world may disappear in 15 years if they do not innovate. Fund industry is not a horse of a different color.


In this situation, as a manager, are you leading strategies and a culture to encourage innovation in your company?


However, and before you get too excited about the idea of starting immediately with the innovation matter within your company, statistics show that almost 80% of new products and services fail during the six months after launch.


So, how can we successfully innovate considering these failure ratios? Professor Carlos Osorio view is that major problems in the company arise when the focus is more on the idea than in the challenge. According to their investigations, 75% of “great ideas” fail. Nevertheless, 99% of attempts to solve “innovation challenges” end as success. In this sense, having innovative leaders in the team will help to improve all areas of the company activity.


Another author, Roy Rothwell at the University of Sussex, provided an historic overview of industrial innovation management in the Western world. He described 5 generations of innovation models: Technology Push (1950-1960), Market Pull (1960-1970), Coupling of R&D and Marketing (1970-1980), Integrated Business Processes (1980- mid 1990s)and System Integration & Networking (since mid 90s onwards). Current innovative companies are associated to a diverse portfolio of partners which together create an innovation system based primarily in exchange of information and knowledge.


Creating this net of employees and partners with innovative capabilities can be a good way to start ensuring the growth and competitiveness of your company.


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10 tips for efficient meetings

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Dear Fund Director,

How many times did you have the feeling that a meeting was going to nowhere?

Find below 10 easy tips to improve your meetings:

1 – Define a clear goal before the meeting. What is the matter you want to solve?

2 – Have an agenda and share it previously with all attendants.

3 –  Ask all attendants if they want to include additional points to the agenda.

4 – Try to avoid to debate about matters with no direct relation to the meeting’s goal.

5 – Manage time. Establish a clear starting and ending time.

6 – Investigate about the main topic before the meeting, so you may add value and not be an obstacle.

7 – In case you invite someone to speak about one topic, doesn’t mean this person has to have an opinion in all topic of the meeting.

8 – Allow all attendants to participate in the meeting. All opinions may count.

9 – Appoint someone as a responsible for applying the resolutions made in the meeting. Use clear deadlines.

10 – Write a report of the meeting, share it with the attendants and put in place the necessary mechanisms to follow up the decisions made.

I found this list in this site (in Spanish). However, there are thousands of websites giving good advices.

Making the right steps to have better meetings will allow us not only to improve our activity but also to feel much better.

I hope this helps.

Your faithfully,

The Indeep Fund Director.

Liquidating a fund

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Dear Fund Director,

If you are liquidating a fund which was under your mandate, you are not alone. Fund industry has its own trends and fashions. And trends and fashions have always a maturity date.

Last week we were informed about the end of the Goldman Sachs BRIC fund. The fund was swallowed up by the GS Emerging Markets Equity Fund. The underlying cause was that the BRIC acronym is not in vogue any longer but formally GS stated reasons were to “optimize” its assets and “eliminate overlapping products”.

Indeepfd - BRIC fund liquidation

(Source: Bloomberg)

This story can also happen to us. Some reasons to liquidate a fund could be:

  • The fund assets are low, we couldn’t reach our asset expectations 3 years after launch.
  • The fund assets are low, the asset class is no longer in fashion.
  • The fund performance was poor in comparison to the benchmark.
  • The fund manager was an “investment star” and decided to leave the company. Then we faced big redemption flows.
  • The fund is doing something very similar to another of our funds. In the end, we are duplicating the strategy and confusing the investors.
  • The investment strategy didn’t work as it was supposed to.

However, in all this cases please think about a nice wording when you inform the regulator and your investors. GS did it very well.

If possible, also as GS did, try to merge the fund you would like to liquidate with another company fund with a similar investment strategy and risk profile and inform properly your investors about the new fund (however, you should sportsmanslikely accept losing part of the investors during or just after the change).

Remember: 1 – Merging sounds much better than liquidating, specially in the headlines. 2 – Offering investors a solution is always better than simply kick them out. 3 – Cash is also a solution. In some cases, probably the best.

I hope this GS example helps you with your next fund “liquidation”.

Yours faithfully,

The Indeep Fund Director


Old KIIDs on the block

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Dear Fund Director,

The KIID  (Key Investor Information Document) is coming back to scene. After having their first golden age in 2010 when the Commission Regulation 583/2010 appeared implementing Directive 2009/65/EC, the banking sector is finally setting up internal procedures to provide the KIID for all investors before entering a fund.

The KIID is a pre-contractual document whose content, length and methodologies are regulated and “harmonised”. In this sense, it is important to make clear that not all KIIDs look equal but disclose the same type of information. The aim of this document is to disclose key data of the fund like past performance, costs, level of risk and main responsible entity of the fund, among others to the investors, with an appropriate language and equal methodologies.


(Source: PricewaterhouseCoopers)

In this sense, it could be useful to be informed about some questions like:

  • How often does the Management Company update the KIIDs?
  • When was last update?
  • Were there any significant changes in costs for any of the funds under mandate?
  • Were there any changes of SRRI (Synthetic Risk Reward Indicator) in the last update?
  • Are the KIIDs prepared for each class or are there any KIIDs for more than one class?
  • In which way the Management Company ensure that investors have this pre-contractual document?
  • Is the KIID provided even in subsequent investments?
  • Is the KIID provided to retail and institutional investors?

Yours faithfully,

The Indeep Fund Director

Chinese shake

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Dear Fund Director,

Just in case the Greek turmoil headlines are hiding some other matters in current financial markets, I would like to inform you about the big sell-off in the Chinese stock market, about -20% in the last 5 days, and propose some questions you may pose to your managers.

According to data compiled by Bloomberg, almost 200 stocks halted trading after the close on Monday, bringing the total number of suspensions to 745, or 26 percent of listed firms on mainland exchanges. Most of the halts are by companies listed in Shenzhen, which is dominated by smaller businesses.

In this sense, I would suggest that you gather information about the impact in the funds under your mandate in 4 ways:

1 – Which is the exposure of the funds to these markets?

2 – Which has been the impact on performance due to these stocks during these last days (weeks, months)?

3 – In which way will the suspension of trading in terms of fund valuation be handled?

4 – What is the fund manager’s opinion on this matter and what is he planning to do in each scenario?

Having said that, find below an interesting chart and link to Bloomberg on the rise and fall of China’s Equity Market and the policies carried out during these last months for a better understanding to the matter.


Yours faithfully,
The Indeep Fund Director

4 key controls to follow as a Fund Director for a Synthetic ETF

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Dear Fund Director,

It is not very common to be a Fund Director of an ETF however, some of you may be in this position now or in the future. In this case, I would like to introduce to you 4 key elements which you should follow closely during your mandate:

1 –  Counterparty risk. The synthetic ETF’s are based on the fact that there is a Swap agreement with a counterpart which is the main driver of performance tracking with the index we intend to follow. See this explanatory document by Vanguard. In this sense, following counterparty risk is key in these funds specially in case of UCITS, where UCITS Directive states that the risk exposure to a counterparty in an OTC derivative transaction shall not exceed 5% of the assets of UCITS, or 10% when the counterparty is a credit institution. Apart from that, there is the EMIR issue that will be developed in next posts. In this sense, it may be worthwhile to pose questions to the risk managers about this issue.

2 – Tracking error. Tracking error is a measure of how closely an ETF follows the index to which it is benchmarked. As this is key for investors looking for Beta, there are public comparisons. It can be a good idea to ask the investment managers which is our historical tracking error for our ETFs.

3 – Costs. Sources of cost may vary: transaction costs, management fees, swap costs. However we must ensure that our ETFs are competitive. What about asking our business developers about the costs of our competitors? Be sure that our potential investors will check this as well.

4 – Liquidity. Investors like liquidity, specially in these days of volatility. Usually asset managers appoint market makers which ensure liquidity and a narrow bid-ask spread. Posing questions on how good our ETFs are ranked in comparison to our competitors with regards to the bid-ask spread will be a good measure to know if our market maker providers are performing well.

I hope this helps.

Yours faithfully,

The Indeep Fund Director.

Turnover Rate: ¿angel or devil?

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Dear Fund Director,

Historically, the turnover rate has been a double edge sword. Fund managers were afraid of it because it meant more cost (and less performance), while financial executives tended to like it because it was seen during several decades as the milky cow of the group. In my opinion, regulation was soft at that time when TER ratios were promoted and did not include the impact of brokerage fees in the ratio. However, Mifid II tried to correct it kind of successfully. Find below the evolution of this ratio, which is showing a decrease in these last years.

Having said that, some investment strategies and asset classes require higher turnover rates. The size of the fund matters as well, given the difficulty of rolling big positions in some funds with huge assets under management.

A high turnover rate should not be considered as a negative element for itself. It may show that the fund manager is active and in this case, if this higher activity means higher returns and lower volatility for the fund, then it could be more than welcome. On the other side, if fund performance is average or poor, drawdowns are not reduced and volatility is average within their asset class, you should really ask the fund manager to explain why the figures are so high?

Yours faithfully,
The Indeep Fund Director