How Some Firms Work to Reduce the Odds of Ending Up With a Loser
In the mutual fund business, mistakes can be expensive.
Considering that it sometimes costs upwards of $500,000 simply to launch a fund, management companies can’t afford to turn out too many losers. Worse yet, a fund that flops can stigmatize the firm’s products as second-rate in the minds of investors.
Enter market research. By asking current, past and prospective shareholders about their likes and dislikes, fund companies have a better chance of developing popular products. Market research also helps companies evaluate their existing funds and levels of service.
It’s hard to generalize about how much research goes on because companies are typically tight-lipped regarding their activities in this area. Besides, some firms put relatively little time and effort into the process; others make a major commitment.
Boston-based Fidelity Investments, the nation’s largest fund company, conducts about 100 different focus groups around the country each year. These are structured discussions that involve about a dozen people, are led by a marketing professional, last two hours and delve into all types of investment questions. Fidelity also conducts about 100 written and telephone surveys annually. “We spend a tremendous amount of our marketing effort doing research,” says Michael Hines, the company’s vice president of marketing. He would not disclose the dollars involved.
Marcia Selz, head of Marketing Matrix in Los Angeles, figures the costs to research a new fund might run just 3% to 5% of the total start-up expenditures--money she says her clients in the mutual fund industry typically regard as well spent. “These are multimillion-dollar decisions getting made from the information collected,” she says. “You need reliable findings.”
What sort of questions get asked? Respondents generally are requested to evaluate a fund group, its products and services, and perhaps those of other financial outfits (see chart). Surveys also vary according to who gets interviewed--investors in general, shareholders at a particular company, or more specialized groups based on age, income, financial experience and other factors.
Much of the research goes to identify areas of potential investor confusion. “Many of the problems crop up in cases where people didn’t understand what they were investing in,” says Selz.
She points to the proliferation of GNMA or Ginnie Mae funds in the mid-’80s. The funds were marketed as a safe, government-guaranteed alternative to certificates of deposit, which typically offer lower yields. Unfortunately, many people didn’t realize the underlying GNMA bonds could drop in value. When interest rates rose in 1987, the GNMA funds suffered principal losses that virtually wiped out their interest income that year, turning off many investors.
Selz says her research, conducted on behalf of fund companies such as Benham Capital Management, Strong Funds and United Services, reveals that a significant number of shareholders don’t read the prospectus and other marketing literature. As a result, they often don’t understand exactly what they’re investing in, nor do they necessarily know about all the services the fund company offers, such as telephone switch privileges, automatic investment plans, free check writing or toll-free phone numbers.
For fund companies--especially the no-load firms, which cater to individuals investing without the help of a broker--this requires easy-to-read marketing literature and knowledgeable telephone reps. “People have come to expect more expertise at the end of the phone, provided at low cost,” says Hines. Selz agrees, adding that she anticipates more companies will adopt 24-hour, 800-number services to attract do-it-yourself types who can’t always make their investment decisions during working hours.
Of course, even when marketing research turns up interest in a new type of fund or service, that doesn’t necessarily mean a company will bring it to fruition. In the initial euphoria following the Persian Gulf War, Fidelity’s staff sensed interest among some shareholders in a sector fund that would invest in corporations receiving contracts to rebuild Kuwait.
“It was an interesting concept, but it also seemed to have too short of a time frame,” says Bill Hayes, a Fidelity senior vice president, in explaining why the firm nixed the idea. “You have to ask whether a product has marketing appeal and whether it can also be a long-term investment success.”
To test the performance potential of a new fund, some companies will launch a trial version of the product before offering shares to the public. It’s not unusual, Hayes says, for Fidelity to hand $1 million or so to a portfolio manager and have that person run the fund in-house for about a year. If the results look encouraging, the company will launch a public fund.
And then again, not all successful products are the result of much marketing research--at least in a formal sense. Alliance Capital Management didn’t conduct any focus groups, mail surveys or such before it unveiled its two Short-Term Multi-Market Trust funds in early ’89 at a start-up cost of roughly $700,000, says Mike Laughlin, a senior vice president for Alliance in New York. Instead, Alliance reps merely gauged interest by talking to brokerage officials and by monitoring the prevailing sentiment of investors at a time when the October ’87 stock market crash was still a pretty fresh memory.
The two Alliance funds, the first of a slew of low- volatility foreign bond portfolios, turned out to be big hits--attracting $5.2 billion between them in the two years since. “We didn’t need a focus group to tell us that investors wanted stability of principal and a yield better than a CD or money market fund,” says Laughlin.
What Gets Asked
Market research conducted by or on behalf of mutual fund companies often tries to gauge how well investors understand, appreciate and use in-house products and services. Here are some typical questions, drawn up by Marcia Selz, head of Marketing Matrix, an independent research firm based in Los Angeles.
When it comes to investing, where would you place yourself on a scale of 1 to 10, if 10 means very risk-oriented and 1 means very conservative?
How would you characterize the family of funds you’re invested in? Which of the following would you say it offers? Many choices. Sufficient choices. Limited choices. Don’t know.
Overall, how would you rate your investment in your mutual fund? Superior. Good. Fair. Poor.
Thinking about the information you have received from your mutual fund, how would you describe it? (Choices range from 1, Not Useful, to 10, Very Useful; and from 1, Difficult to Understand, to 10, Easy to Understand.)
Here is a list of services that a fund may or may not offer. Which of these services are currently available to you? Automatic investing. Systematic withdrawal. Unlimited telephone exchanges. A 24-hour, 800-number telephone line. Individualized investment advice. IRA plans. Reinvestment of dividends from one fund to another without service charge. Free, unlimited check writing from a money market fund.
