As much as they want to come up with innovative products that can capture the imagination of the generally risk-averse retail investor population, fund houses are unable to do so easily because of cost concerns.

Fund managers worldwide are cutting back on product launches in 2009, citing budgetary constraints as the biggest issue facing product innovation, according to financial services consulting firm Cerulli Associates. These constraints, along with reduced staff, are affecting the fund houses' efforts to bring new products to market.

"Many asset managers are focusing on product rationalisation, consolidation, or efforts to raise assets."

"As a result, less time is being spent on innovation," says Pamela DeBolt, Boston-based author of the Cerulli Quantitative Update: Retail Products and Strategies 2009 report.

When given the opportunity to launch new products, it is taking fund houses longer to do so. Rather than creating "me too" products or products that tend to be a carbon-copy of the latest in-demand fund, fund houses are faced with the challenge of creating unique, never-before-done products, Cerulli notes. However, creating unique products takes time and resources, which tend to be at a scarcity given the current reduced manpower in the asset management industry.

"Amid the many challenges this industry is facing, product innovation will be directly related to firms' budget constraints as the market turmoil continues to play out in 2009," DeBolt says. "Many executives were shell-shocked by the events that unfolded in the fourth quarter of 2008 and are taking a wait-and-see approach, placing initiatives on hold and taking on the necessary task of reducing budgets."

The report notes that more than half (55%) of asset managers worldwide expect their product development budget to decrease. The budget landscape has changed significantly since Cerulli's last survey of industry executives around this same time last year, when only 12% of asset managers responded that their budgets would decrease, and 59% of asset managers said that their budgets would increase.

"Although, many firms will likely be focused on consolidating product lines to eliminate unprofitable funds, we see some firms that recognise the importance of moving forward with new product initiatives," says DeBolt, who notes that fund houses that position themselves well now will reap the benefits when the markets finally stabilise.

A recent study by research firm Greenwich Associates has pointed out that global fund houses appear to be cutting costs too aggressively in Asia, considering that revenue declines in the region have been less than those in the US. These cuts have been driven by a global look at the fund houses' business strategies and development, however, and are often unavoidable.