Survival and growth for new mutual funds and ETFs are not guaranteed, even for established managers. Recent data from FUSE Research reveals that only 25% of funds and ETFs reach $250 million in assets under management (AUM), 26% do not meet this level, and 49% shut down within five years. For boutique asset managers, these statistics can be concerning. However, understanding the key factors contributing to a fund’s growth can provide a strategic advantage.

This article examines the challenges and strategies that can help new funds survive and thrive in today’s market. For simplicity, we will refer to mutual funds and ETFs as “funds” in this article.

The Stark Reality: Survival Statistics

The FUSE Research report provides a sobering look at the success rates of active funds within five years of their launch, using data from funds launched after December 2012. Additional data points include:

• As the AUM targets increase to $500M and $1B, the percentage of funds passing these levels decreases to 16% and 9%, respectively.
• The percentage of funds not meeting the AUM targets increases as the levels rise, with 33% not reaching $500M and 38% not reaching $1B.
• Across all AUM levels, approximately 50% of funds shut down.

These statistics underscore the challenges new funds face in achieving growth. Fund managers must understand and navigate these hurdles to better position their funds.

It’s important to note that many funds can be profitable at just $50-$100M in AUM. This level of initial capital is often achievable through partner capital, friends, family, and company clients, providing a foundation for growth and attracting more investors.

Challenges and Growth Factors

New funds encounter several challenges that can impede their growth. However, some funds break through by identifying and addressing these challenges and achieving significant AUM growth. Key factors include:

• The Myth of “Build It, and They Will Come”: Many asset managers assume that merely launching a fund will attract investors. This “build it and they will come” mentality is a common misconception. In reality, attracting investors requires a good story and telling it consistently to the right investors.
• Understanding Breakeven and Profitability: The breakeven point is critical yet often overlooked. Many managers focus solely on operating fees without considering sales and marketing expenses. Understanding total costs and the AUM needed to break even, and profit is essential for growth. When developing a break-even analysis, include sales and marketing costs, as these expenses can significantly impact the AUM required to reach profitability.
• Market Competition: The asset management industry is highly competitive, with numerous funds vying for investor attention and capital. Successful funds often have a unique value proposition and compelling storytelling that resonates with investors, helping them stand out in a crowded market.
• Distribution Headwinds: Building a robust distribution network to reach potential investors can be difficult, especially for boutique firms with limited resources. Effective marketing strategies and distribution networks are critical for reaching potential investors and driving AUM growth.
• Resource Constraints: Smaller funds often lack the resources and scale to compete effectively against larger, well-established firms. Larger firms with greater resources tend to launch and nurture more successful funds. According to FUSE, firms with $25 billion or more in AUM are more likely to have active mutual funds (23%) and active ETFs (20%) that exceed $500 million in AUM.

Questions to Ask Before Starting a Fund

Before launching a fund, managers should ask themselves strategic questions to ensure they are well-positioned for success. These questions can help identify potential obstacles, clarify the fund’s unique value proposition, and develop effective strategies for attracting and retaining investors.

• What is our unique value proposition? Determine what sets your fund apart from the competition and how it addresses specific investor needs.
• Who are our primary competitors? Identify your competitors’ strengths and weaknesses to find opportunities to differentiate your fund.
• What is the target market for our fund? Define the demographics and preferences of your ideal investors, such as high-net-worth individuals or institutional investors.
• Do we have the necessary resources to support a new fund launch? Assess whether you have the financial, human, and technological resources required for a successful launch.
• How much AUM can we likely get from friends, family, and clients? Estimate the initial AUM you can raise from your close network or seed capital to help kickstart your fund.
• What is our sales and marketing strategy for winning third-party investors? Develop a robust strategy to attract and retain investors beyond your immediate network.
• What steps can we take to overcome distribution challenges? Developing a multi-channel distribution strategy that leverages both traditional and digital channels can help expand your fund’s reach.

• How can we maximize our resources to compete with larger firms? Outsourcing non-core functions and leveraging technology can help level the playing field against larger competitors.

A Strategic Approach to Growth

The asset management industry is undeniably competitive, and the survival rates for new funds are challenging. However, new funds can enhance their chances of success by focusing on initial investors, differentiation and storytelling, and marketing and distribution efforts. Addressing critical questions before launching a new fund can ensure that boutique asset managers are well-prepared for the challenges and opportunities. Don’t let the challenges deter you—embrace them as opportunities to innovate and excel in the market.

Understanding the competitive landscape and implementing effective strategies can significantly improve a fund’s chances of success. If you want to navigate these challenges and achieve AUM growth for your mutual fund or ETF, schedule a free strategy session with us today. We’ll discuss your situation and explore how we can help you attract investors.

Dan Sondhelm is the CEO of Sondhelm Partners, a firm dedicated to helping boutique asset managers like you attract investors, strengthen credibility, and build influential brands.