Alternative investments weren’t fully spared the market tailspin that ended in 2009—but the market’s gyrations have certainly proved the value of diversification into investments not correlated with equities. In fact, investor appetite for risk management and capital preservation remains high, despite sustained positive stock market returns and improved liquidity. Clearly, advisors and investors are becoming more convinced than ever that alternative strategies should be a key component of a well-diversified portfolio.

In this Webinar you’ll learn…

• The best use of alternatives in mutual funds
  A quick ride along the learning curve examining the broad range of alternatives…how they look in a mutual fund format…and what to expect in terms of risk/return.
• The long and short of long/shorts
  A primer on the broad topic of long/short—one of the most widely misunderstood alternatives for advisors—covering the many forms of long/short funds…and how they work.

Click here to Register Today!

Advisors and the New Breed of Funds
Alternative Asset Classes, Leveraged ETFs, and More 

How do alternative asset classes, tactical asset allocation strategies, and leveraged ETFs provide the protection clients want while offering the alpha they inevitably demand? What are the risks and benefits? Join Registered Rep. magazine for an online panel discussion today.

The past eighteen months have underscored the importance of asset allocation and risk management. Last year’s run up also suggests we can anticipate more subdued returns for long-only investors. In response, asset managers are developing and launching funds that reduce portfolio volatility and increase exposure to alternative asset classes. Other new products enable advisors to allocate assets tactically within a long-term strategic framework.

We’ll discuss these trends with a panel of experts and focus on:

• The impact of alternative asset classes on portfolio volatility
• Using managed futures products in client portfolios
• How ETF’s can provide tactical exposure and hedge risk

Click here to Register Today!

CSRwire is the leading source of corporate social responsibility and sustainability press releases, reports and information.

Visit CSRwire Talkback Blog

Do SRI strategies produce results?

By Lisa Cohen

An old saw among investment portfolio managers is that “sin” stocks – tobacco, firearms, defense manufacturers and so forth – outperform stocks of companies focused on doing the right thing. Skeptics of responsible investing also point out that social agendas and values constrain investment managers from picking simply the best investments. This shortsighted axiom largely misses a key point illustrated by the financial crisis. Corporate misbehavior and excessive risk taking at formerly well-regarded organizations has created disastrous financial results, and been punished quite severely by the securities markets. At the same time, prudent and careful organizations have weathered the storm in better shape.

Now, in addition to these rather obvious opportunities for improvement of corporate behavior and financial results, we also have validation of investment outperformance for responsible investment funds in a recent study by the Social Investment Forum (SIF), an organization for responsible investing industry professionals.

SIF recently published the results of a year-end 2009 analysis showing that 65% of the all of the funds they classify as socially responsible actually outperformed their benchmarks in calendar 2009, across all asset classes and market caps, after expenses. Investment wonks will want to know about the long term performance stats, and rightfully so. Over the past ten years, arguably among the most difficult of investing periods, 37.5% of the responsible funds outperformed their respective benchmarks. Most significantly, the largest percentage of funds (65.5%) outperforming their indices on a ten year basis are in US Large Cap category, competing against the notoriously hard-to-beat S&P 500 index. Bond funds did not fare nearly as well, and none of the funds evaluated beat the (also very efficient) Barclays Capital US Aggregate index. Check out the interactive tool at http://www.socialinvest.org/resources/mfpc/.

Contrarians will point out that every analysis – this included – has its limitations. The data does not take loads into consideration. And it looks at just 22 fund families, which in this case, represents a healthy cross section of available data. However. In our view, that any analysis could prove straight-up index-beating performance for responsible investing funds is worthy of celebration and a bit of “I told you so.”

As the responsible investing movement has grown, many investment professionals have begun to yield ground on their old-school position. There is increasing agreement that factors including a company’s impact on the environment, its social agenda, and its governance practices (all together referred to as ESG) have a direct impact on the bottom line and the performance of a company’s securities over time. Bloomberg terminals, a key information source for most portfolio managers, now offer a package of ESG data on companies they cover, making environmental impact info is as accessible as stock price-to-earnings ratios.

To get here, champions of the cause have waged a battle for credibility, supported by investors’ commitment to values and causes. While quite bracing to be on the offence all the time, it is quite nice to rest for a bit and point in the direction of some performance data as support for our position.

About Lisa Cohen
Lisa Cohen is the CEO and Principal of Momentum Partners, an advisory firm to financial services and investment management industry leaders committed to driving growth and innovation. Lisa works with clients to address evolving distribution channels, innovate new products and services, identify partners and collaborators, build strategies and business plans, and more. She is a motivational leader who inspires and supports contrarian thinking, a frequent industry speaker and moderator, and regular media contributor. Momentum Partners is a signatory to the United Nations Principles for Responsible Investment and a member of the RepThinkTank, a consortium of specialized investment industry providers brought to market by the RegisteredRep team. Lisa writes the FundHouse column for RegisteredRep Magazine. Lisa’s background includes leadership positions in both corporate financial services (Managing Director and SVP, Evergreen Investments and Director, John Hancock) and advisory/consulting services. Lisa is a graduate of Smith College and has completed Harvard’s Executive Education program in Investment Decisions and Behavioral Finance.

READERS: What’s your Talkback to the question: Do SRI strategies produce results? Let us know, and we’ll respond.

First, there’s a need to agree on a common vocabulary. The term ‘sustainable investing’ is newer than SRI (socially responsible investing), and reflects an evolution in thinking about the industry. It describes an investment approach that uses a financial framework that incorporates environmental, social, and corporate governance issues to evaluate investment opportunities.

Read article: Sustainable Investing Strategic Insight WINDOWS December 2009 (PDF 84kb)

The mutual fund industry loves to launch new products. But fund companies should close long-term laggards before launching more.

Read article: FundHouse November 2009 (PDF 183kb)

[Download printer-friendly newsletter: Spring 2009 Newsletter (PDF 164(kb)]

Dear Friends, Colleagues, and Partners,

You may have seen that the New York Times finally has a label for this – the “Great Recession.” We’ll see if it stands the test of time, but it is another indicator that we’re starting to get more of a handle on this event. While waiting for full visibility, we’ve observed that many industry executives are still focused on business as usual, just with a sharper pencil. Like reluctant homeowners, we are not all yet at the point where many companies have capitulated and are acting on the opportunity for radical restructuring.

(The chart below from Bain & Co. confirms that more gains come from major change than from tweaking.)

The real opportunity will come to those who take a step or two back and evaluate what is happening with clear eyes and a blank spreadsheet. It may be a while before we really “know” what the landscape looks like. So as an alternative to the full view of the future we all crave, I’d like to lay out a couple of different ways we might frame this opportunity for ourselves.

1. Go ahead and grieve. Get mad. This is incredibly sad. And something to be really angry about. People we care about have lost and are losing jobs. Businesses we’ve worked hard to build are losing topline revenue by the bucketful. A few people made some really bad decisions that affect us all. Everyone has been touched in that most sacred place - the portfolio. True, some lousy businesses are now DOA and that is OK. But the rest is just awful.

2. Be creative. If you and your firm are ready, begin to craft a distribution strategy that reflects a concentrated handful of national full-service firms and many RIAs and indies in transition. (We see a huge rollup opportunity for small regional B/Ds and RIAs, but not everyone has the skill set to drive that model to success, so it may not really change the distribution landscape anytime soon.) Internal reorganization will likely follow a retooled strategy.

3. Be realistic. If your firm or product line is more “opportunity for improvement” than “we’re on the right track,” this is the time to say so – without career risk. Small funds are a problem, consistent  underperformance has no role in the new world order, and packaged products with layered fees raise a red flag for properly skittish advisors. This is a great time to take an unbiased look at your manufacturing plant and see what you need to retool.

4. On a more personal note, do something proactive and cathartic. Have a recession/bear market coffee break. Invite everyone in the office to bring an unopened envelope they’d like to shred. (Account statements, offer letters for jobs that went away, you get the idea). Or host a brown bag lunch / Yankee swap of overpriced stuff you bought during the boom years. It’s time to turn this around - beginning with our own perspectives.

With sincere wishes for good things,
Lisa Cohen, CEO, Momentum Partners, LLC

IN OTHER NEWS

FINANCIAL ADVISOR TRUST BENCHMARK NOW AVAILABLE
In partnership with Registered Rep, we’ve created an industry-wide, all product, all channel  benchmark for advisor trust. Registered Rep will be publishing updates to the industry-level benchmark quarterly. If you’d like to use these benchmarks to measure where your firm and products stand in the minds of advisors, give us a call. The “trust vacuum” creates a great opportunity for some firms - and an opportunity for improvement for others. Find out where you fit and what your roadmap to success looks like.

ABOUT MOMENTUM PARNTERS, LLC
Momentum Partners, LLC serves the financial services, investment management, and related industries with creative market research, thoughtful product design, and effective go-to-market strategy and implementation. Momentum Partners is a signatory to the UN’s Principles for Responsible Investment. Our Social Responsibility Practice is dedicated to serving the SRI and ESG communities.

Download printer-friendly newsletter: Spring 2009 Newsletter (PDF 164(kb)

Lisa Cohen is the founder and CEO of Momentum Partners.

Q. Has the interest increased/decreased for alternative investment type mutual funds?

A. The arguable failure of simple diversification as the sole risk management tool has created a significant opportunity for products that use other mechanisms to control risk in clients’ portfolios. That said, we’ve seen in some recent advisor surveys we’ve completed that advisors’ love affair with hedge funds and private equity is over. However, I do think advisors have bought into the concept of a globally diversified portfolio of both asset classes and product structures. In order to implement that, advisors need more products that offer access to niche asset classes. Further, they also need different types of exposure to well-understood asset classes, such as equal-weighted index funds and inverse exchange-traded funds.

This crisis has proven that buy and hold is not a risk management tool for today’s global market. We see some of the best opportunities right now for funds that are less correlated to core asset classes or that have some hedging characteristics. Taking a page from the institutional side of the business – global macro strategies, in which managers look at prices of all asset classes globally, are one of the more attractive approaches right now.

Tactical asset allocation (TAA) and absolute return approaches are also promising. With TAA, portfolio managers attempt to create extra value by taking advantage of certain marketplace situations – by overweighting certain asset categories while underweighting others. With absolute return, managers seek to achieve positive returns regardless of the general market direction. Target returns are often set to relative cash or inflation rates, and long and short positions are put on and off to achieve the larger investment goal. Anything that takes risk off the table is an opportunity in this market.

There is a risk inherent in some of these new products – and concerns exist over whether investors completely understand how these products perform in all market environments. We’re seeing heavy trading in ETFs and indications that advisors are increasingly turning to indexing. If you’re selling leveraged ETFs for example, you want to be sure your advisors know how “not to get hurt” as well as how to use them to grow client assets. Firms have to have the appetite for the costs and complexities involved in rolling out such products to advisors and retail investors.

By Lisa Cohen

The very mature mutual fund industry is going to need to reinvent itself in the wake of the credit crisis. The onus will be on funds to gracefully change how they do business, and to do so in a manner that sits well with investors. No less than the financial well-being of most Americans is as stake. The key ways that “Mutual Funds 2.0” will come about are as follows:

Core Competency

Each firm managing other people’s money must have a unique and fully differentiated core competency and achieve better results than anyone else. There is simply no need for me-too products. Every investor is entitled to the best product available at the most reasonable price. A product line oriented around this idea will include a handful of top-selling products focused around a core competency that are a fit for the current investment climate. Fund companies should also include a number of products on the “back burner.” These strategies will be suited to the coming investment environment. And yes, no one knows what strategy that is. Remember, that is why product management is an art, not a science.

In this environment especially, new ideas centered on core competencies are needed on the product development side of the business. Core competencies can be specific investment styles, approaches to organizing portfolio management teams, firmwide pricing structures and flagship products that can be broadened into an entire product line.

Results

Every investment shop should take a clear look at its product lineup and cut, merge or deliberately and strategically deemphasize the bottom 20% of the product set. If it’s not a center of excellence, then it’s a diversion that a focused firm — and its worried clients — can ill afford.

Fair and Reasonable Prices

The fund and advice industries need to clearly delineate what consumers are paying for. They must explain at which points in the process advice, asset management and administration fees are paid. Fund companies must ensure that each component of the cost is reasonable. Total fees must be a number that allows investors to make money over time. If exchange-traded funds, essentially a single-share-class fund, are the better mousetrap, than fund companies must figure out how to approximate that product model on legacy products when possible.

Doing the Right Thing Is Right

As proved by the growing appeal of socially responsible mutual funds and all things green and sustainable, we see one other solid booster for these types of funds. Investors currently know what the industry has always known: While invested, people’s hard-earned dollars are traveling around the world and taking all sorts of unexpected turns (auction rate preferreds, hedging strategies requiring counterparties, and so forth) in vehicles as Main Street as closed-end income funds and hedged mutual funds. We think this newfound knowledge is an excellent example of how the law of unintended consequences will drive flows to funds that take environmental, social and governance issues as seriously as they do their investment strategies.

Yes, we are living in interesting times. And fund companies can make the situation work in their favor by strictly focusing on products that embrace core competencies, revising pricing practices so investors know what they are paying for at all times and adopting a communications strategy that ensures greater transparency. If these principles are embraced, funds and investors can easily have confidence that their best days are ahead of them.

QUESTION:
Has the recent market turmoil created new opportunities for managers? If so, what types of managers will benefit?

Executive, Top 25 Fund Family, West Coast

ANSWER:
Lisa Cohen is the founder and CEO of Momentum Partners, LLC.

I do believe that this seismic, cataclysmic activity is going to create new opportunities, particularly for active managers pursuing the subadvisory channel. Keep in mind that today’s market downturn is worse than the 1987 recession and the dot-com bubble. If a subadvisor can’t grab the market’s upside, it faces the real prospect of getting flipped out. A boutique shop that knows its sector better than its peers will have the best shot at gaining opportunities in this environment. Those managers will be able to identify value and have a deep understanding of particular company balance sheets in specific sectors. The current climate does not bode well for managers who are driven by specific style boxes. In today’s environment, it’s more about performance than anything else; performance in specific style boxes is less of a priority.

Managers looking to grow in the subadvisory channel will have to talk about their performance in this time period. If short-term performance represents a challenge, you are going to have to drill in how your fund adds value to the investor. It’s important to talk about how your team makes decisions, how you view the world and long-term track records.

[Download Printer-friendly Newsletter: Newsletter Fall 2008 (PDF 68kb)]

Dear Colleagues,
In adversity, there is opportunity. The media is doing a great job of covering the adversity, so let’s (pull ourselves away from the slow motion train crash) and focus our attention on the opportunity. These times of extreme challenge are a good time to prune product lines, revisit distribution strategies, and talk to the press.

1. The old financial distribution channel models are completely outdated now. There are, essentially, no more wirehouses. Banks are now a much more significant channel, but there will certainly be cultural differences in selling into a B of A-owned Merrill Lynch. And independents may be the big winners. All that said, it is our experience that when a tried and true distribution and/or product model is under attack we tend to get a bit jealous and guarded about exploring new ways of doing business. This is one of those times. The old distribution models are being dismantled bit by bit, creating opportunity for new – perhaps more profitable – asset management and distribution models.

2. Consider asking your clients – and theirs – about trust. A loaded question right now, of course, but likely to get a vigorous response. This could be a survey about how they feel about products, distribution models, markets, or whatever is most relevant for your firm. The best reason to do this is that even if you don’t ask, and therefore do not know, people will still act on their feelings. If you know how deep the trust abyss is, you can build the right bridge.

3. Talk to the media. If you need a good media relations firm, let us know and we’ll get you to the right place. If you already know a reporter or two, call them and ask them what they are writing about right now and how you can help. Then be available when they call and/or give them the data or referrals to other sources they need.

4. Let us know if we can help. Don’t hesitate to call if you’d just like an ear and some perspective. Consider sustainable investing (see below) as an approach that could help build your business. And please don’t keep us a secret – we always appreciate you letting colleagues know of us if you feel we may be helpful to them.

Sincerely,
Lisa A. Cohen
CEO & Principal

ABOUT MOMENTUM PARNTERS, LLC
Momentum Partners, LLC serves the financial services, investment management, and related industries with creative market research, thoughtful product design, and effective go-to-market strategy and implementation. Momentum Partners is a signatory to the UN’s Principles for Responsible Investment. Our Social Responsibility Practice is dedicated to serving the SRI and ESG communities.

Download Printer-friendly Newsletter: Newsletter Fall 2008 (PDF 68kb)