Thoughts

What Do You Say About Risk?

Posted by Anu Heda on May 25, 2011, in Thoughts , tagged with , , , , , , , ,

In our consulting work, we meet marketing executives wanting to extol their firm’s risk management practices.  Risk management poses a specific problem.  Stay to high-level and it sounds like you don’t manage risk.  Discuss procedures and controls and risk losing your audience.

Below is copy taken directly from three industry leading firms: Western Asset, Janus, and Dodge & Cox.  Great firms struggle to convey a straightforward process.  Many firms – BlackRock, MFS, PIMCO, Pyramis, & Vanguard – don’t emphasize the topic on their public Web sites.  Any of the below copy strike a chord with you?

We’re curious what you think should be conveyed when discussing risk management.  Send us an e-mail or message via Twitter.  I pasted all that copy into a word cloud software to see what words are most common: risk management is often described with the words “investment” and “team” (note: I excluded “risk” and “management.”)

Western Asset

Western Asset has a dedicated risk management team that oversees risk management and incorporates it into the investment process. While this team is integrated into the portfolio management unit, it has a separate and independent reporting structure. Western’s risk management team combines the best of the Firm’s technology and experience to develop useful risk management tools and procedures. These tools and procedures provide daily analysis for both the Investment Team and the Analytics/Risk Management Department, ensuring the integration of professional risk management practices into the investment process.

Janus

The Janus Risk Management team, headed by Dan Scherman, serves as a resource for portfolio management to assure that every portfolio maintains the appropriate level of risk given its performance objective. Additionally, the team helps to assure that risks taken are associated with intended bets.

Tools used to monitor risk include:

  • Tracking error decomposition, characteristics, concentration, Janus ratings, under-weights/over-weights
  • SPAR returns-based style analysis
  • Performance attribution (Factset, BARRA, Wilshire)
  • Index and competitor analysis, as necessary

Dodge & Cox

From the earliest days, Dodge & Cox’s investment approach has stressed evaluation of risk relative to opportunity. A strict price discipline — steering clear of popular choices that come at a price premium we would rather not pay — is critical to achieving our investment objectives. Low valuation investments, for example, typically reflect low investor expectations that may serve as a buffer against the risk of significant price decline; these low expectations may also create greater potential for capital appreciation should investor pessimism turn out to be unwarranted or short-lived. At all times, our ongoing search for superior relative value is guided by a rigorous research process that seeks to differentiate the short-term concerns that may be temporarily depressing an investment from the intractable, long-term problems that could doom it.

Re-purposing Market Research

Posted by Anu Heda on May 24, 2011, in Thoughts , tagged with , ,

In the last three months, we’ve been involved in a handful of engagements where our clients provided previously executed market research as an input to our work.  I thought of four important characteristics of great research.

Point 1 – Honor Vintage – Asking clients and prospects questions about their livelihood is tied to many other factors: namely the marketing condition at that time period (e.g., Q4 2009).  Use research in context to the market conditions when the research was fielded and don’t try too hard to extrapolate the results over a long time horizon.

Point 2 – One Cook at a Time – The best research executions seem to have one internal owner that decides on the goal, finalizes the questions, and manages the process.  The research that seems to become “watered down” becomes so because numerous groups get involved and want a few of “their own” questions.  That can lead to long and unwieldy research with difficult to understand results.

Point 3 – One Goal at a Time – Similar to point (2), the research we’ve seen that’s been extremely effective has one (maybe two) goal at a time.   In our opinion, most firms are better off doing numerous smaller research initiatives, where feasible.  Having a single goal, such as, “Will our thought leadership be credible to breakaway advisors?” is usually more effective than broad “state of the industry” research.

Point 4 – Analyze in Two-Dimensions at a Time – Analyze the data in easy-to-digest sets. “Independent Advisors with 100MM+ AUM” is easy to understand and consider.  “Independent Advisors, with $100MM+ AUM, 50+ clients, CFA charter, and previous work at Merrill Lynch or US Trust” is difficult for anyone to get his/her head around.  Just because you can slice/dice data in nifty ways does not mean it’s helpful.

As you consider market research, we hope these learnings from reviewing many good research initiatives will help.

When an Advisor Calls, Who (or What) Answers?

Posted by Mike McLaughlin on May 16, 2011, in Thoughts , tagged with , , ,

The other day I heard a radio ad for a company promoting green technology. Most of the ad wasn’t memorable – I don’t even recall the name of the company – but the ending stuck with me. The firm gave out their toll-free number and then stated that “a live person will pick up your call”. No automated system (IVR). No menu to navigate.

I thought that sounded pretty good.

I then wondered: do any asset managers have a live person answering their toll-free phone numbers for advisors? So I called ten firms to find out. The results:

  • One firm, Nuveen, has a sales rep pick up directly.
  • Another, Columbia, has an IVR say your call is important before patching the advisor through to a rep.
  • Three others – BlackRock, Delaware, Janus – prompt first for an extension then have the advisor hold for a rep.
  • The remaining five firms present an automated menu with anywhere from 2-6 options.

In other words, half the sample enabled an advisor to reach a human being without proactively doing anything besides placing the call. Yet only Nuveen has that call directly answered by a person. I can’t claim that this makes Nuveen’s customer service any better, or that they do a better job of converting cold inbound calls to sales. But I do think the direct personal interaction is, simply, nicer. And, evidently, rare.

(As a sidebar, the configuration of the different IVR systems is worth another discussion down the road. The options vary significantly by number/type. And, interestingly, two firms use their IVRs to promote specific products prior to presenting a menu of options.)

Advisors investing in prop products – strange sounding…

Posted by Anu Heda on Apr 24, 2011, in Thoughts , tagged with ,

Registered Rep chronicled the story of a few Independent Advisors & RIAs starting their own investment vehicles.  A primary selling point is transparency – if the advisor manages the vehicle, he/she can share daily transactions and holdings.

So many asset managers; so many investment vehicles; so many investment strategies – these advisors could not find any investment product that provides the transparency and the strategy they seek?  Naturally, I was a little skeptical.  The virtues of open architecture are well-documented and many providers invest heavily to reinforce those benefits.  So why bother?

Maybe there’s a different play though.  I can think of two investor types that may prefer this:

  • Nervous Nellies – They want to spend their evenings fretting over holdings, performance, and other data points.  For that reason, they like trading in specific equities and even mutual funds.  They may have bought into the concept of alternative investment strategies, but can’t reconcile the opaque nature of hedge funds.
  • Bragging Bills – They want exclusivity at the cocktail party.  An adviser who provides these clients access to some fund without easy access can boast about it.  It’s sort of hedge fund “lite.”  (And this may improve prospecting for the FA.)

Is the advisor unable to find a product or is there value in having a proprietary product in the bullpen?

Is Anything Absolute?

Posted by Anu Heda on Apr 22, 2011, in Thoughts , tagged with , ,

This question occurs as we develop a marketing and sales approach to investment vehicles labeled “to seek absolute returns of …”  There’s a desire for investment providers to sell absolute returns, but I don’t know if there’s an interest in thinking in absolute terms.  Putnam has a set of videos that describe the absolute return mechanics.  They even produce an engaging blog dedicated to absolute return as well.  Does any of this content (or other) convince you to use absolute return investment products?

Humor me and imagine two scenarios –

Scenario 1  – FundCo’s Absolute Return had a 2% return in ’08.

Scenario 2 – OtherCo’s Absolute Return did 20% last year (’10)

In casual conversation among non-professional investors, mismatching years like this is pretty common.  If someone told you about both scenarios, where would be the first place you would go to compare these past results? If you’re like me, you may use Google finance to understand that FundCo was 39 percentage points better than the S&P in ’08, while OtherCo was about 10 better than the S&P in ’10.

My thinking is relative, not absolute.  I understand that these manufacturers are striving to produce a return regardless the direction of financial markets.  That’s a difficult frame of reference to set with prospective investors.  Professional investors provided with different funds’ returns for the same year typically look at each fund relative a relevant benchmark.

So while I haven’t seen anything compelling yet, I realize we’re still in the first act for absolute return products.  There’s a long way before the show is over.  Yet thus far, it’s not been very convincing.