Think it’s hard to start a new fund? Try marketing it

Want to start a new mutual fund? That’s the easy part. It’s marketing that has gotten tougher.

The process of starting a mutual fund may seem daunting: After all, you need to line up custodian banks, push filings through the Securities and Exchange Commission and hire lawyers to help those filings go through.

“Launching is the easy part,” said Rob Slaymaker, partner at Alambic Investment Management LP, which launched two new funds in December, the Alambic Mid Cap Value Plus fund (ALMVX) and the Alambic Mid Cap Growth Plus fund (ALMGX). Alambic used a third party, Ultimus Fund Solutions, to assist with compliance, administration and launching the fund.

Launching an ETF now is easier than it was five years ago, said Christian Magoon, CEO of Amplify ETFs. “There are several white-label providers that offer prepackaged solutions to the exemptive relief process [at the SEC],” Mr. Magoon said. “And in general, the exemptive relief has sped up from what it historically has been. In that way, getting a product to market has never been easier.”

But for both ETFs and actively managed open-ended funds, the launch is just the start of the battle. “The launch was relatively easy, and the management was relatively easy, because we were using the same stock selection model as our long-short hedge funds,” said Mr. Slaymaker. “The interesting part is selling in this environment.”

Among the hurdles new funds have to overcome:

• The active-passive struggle. “The active versus passive battle is still going strong,” Mr. Slaymaker said. Actively managed funds have seen net inflows of $11.4 billion the past 12 months, according to Morningstar estimates. Passively managed funds have welcomed more than $400 billion in the same period.

• Morningstar. Funds don’t get a Morningstar rating until they have a three-year track record — and selling a fund without a Morningstar rating is tough sledding. Funds with a three-star rating or better saw estimated net inflows of $385.3 billion the 12 months ended May, according to Morningstar. Those with two or fewer stars saw $27.3 billion.

• Fees. It costs more to run a small fund, and funds with above-average expenses are the least favorite among investors and advisers. “Fees in general are going down, especially given the competition from the passive side,” Mr. Slaymaker said.

And there’s also the problem of getting on a distributor’s platform. Advisers and brokerages have varying requirements to gain access, chief among which is assets under management. Some platforms, too, have special requirements to comply with the Department of Labor’s new fiduciary regulations. Ameriprise, for example, slashed a number of funds from its platform this month, citing the new DOL rules.

ETFs have big struggles, too — not least of which is the crowded field. “Getting to market is the tip of the iceberg,” Mr. Magoon said. With more competition — Morningstar now counts 2,034 exchange-traded products in its database — comes more competition for attention from advisers.

In particular, advisers are looking for more backtested models, Mr. Magoon said. “Firms are spending more time to look at funds’ behavior and real-world results than ever.”

More importantly, advisers are looking for ETFs they think will survive — and that typically means $10 million to $40 million in assets with strong trading volume. Large asset allocators typically want to see at least $100 million in assets before they’ll place a $3 million to $5 million order. “People are looking for seasoned products,” he said.