active management

Is Originality Important When it Comes to Content?

Posted by Mike McLaughlin on Oct 18, 2016, in Thoughts , tagged with , ,

Three semi-quick steps to get to my answer…

1. I tweet very infrequently.

2. The reasons I don’t tweet are multiple and common. But one of them is relevant to the question at hand: I don’t want to say something or make an observation that has already been made thousands of times before.

Case in point: my tolerance for spicy food has grown with age. So, as part of a recent Thai food order I upped the spiciness. Before the food arrived I started to wonder how I’d react to it. My thought process quickly went:

spicy-flow-chart

At this point I had a few version of a “spicy / Ark of the Covenant” tweet in my head. Still, as I considered putting it out there one thought popped into my head: has somebody said this before?

3. I assumed the answer to my question was YES, but a quick search showed that instinct to be mostly incorrect. It’s only appeared a handful of times over the years (at least on Twitter). Even so, my hesitation got the best of me and the world was deprived of another tweet.

spicy-tweet

All of this made me wonder about the importance of content originality within asset management. And in a nutshell I came to conclusion that it’s just not very important at all. The most direct illustration I can point to is the defense of active management. Consider that:

  • The current environment has led many, many, many, many firms to communicate a case for actively-managed investments.
  • These cases overlap significantly, making highly-similar points.

Despite the ubiquity and similarity we have been working with a client this month on how to message active management. And I think our client is absolutely right to pursue this effort. Why? First, it boils down to a numbers game:

  • Asset management is fractured, in that there are large numbers of providers and a huge number of clients.
  • This leads to kinetic content consumption. The likelihood of any given client encountering and consuming a single piece of content from an asset manager is low. The likelihood that they will consume content on the same subject from multiple managers is even lower. In other words, content sameness has a limited chance of being noticed.

Second, multiple perspectives are sought out by thoughtful clients. So, even if someone encounters the same ideas from multiple firms, minor nuances can stand out and be memorable.

And finally, going down heavily-traveled content roads is necessary because clients expect a firm to have something to say. For example, what active manager can afford NOT to have a strong case for active management in today’s climate? Ditto meaningful topics like Brexit, the Fed’s plans for rates, and more.

In an era where firms compete not only on product and performance but on the scale and quality of their ideas, covering the most important ideas and topics is crucial while pure originality is simply a nice-to-have.

which way?

Two Ads, Portfolio Construction, and a Strategic Dilemma for Asset Managers

Posted by Mike McLaughlin on Jul 11, 2016, in Thoughts , tagged with , , , ,

A few years ago we worked with a large asset management firm to conduct a strategic review of the robo-advisor market. At the time our client simply wanted to learn more about the space and consider the implications, both good and bad, of these potentially-ascendant companies.

One topic we addressed during the work was portfolio construction. Specifically, the fact that for the most part asset managers held a mostly undefined role in it for advisors and investors.

While we’ve had this conversation many times since, it popped directly into my mind upon encountering two new “Uncommon Presentation” ads from Invesco. Each triggered very different reactions for me. First up, “It’s time to bench the benchmarks”:

This ad relays exactly the type of message I’d expect to see from Invesco or any firm with significant actively-managed offerings. It relays the need to build portfolios with more than just straightforward index (or low active share) strategies. The implication is for investors who buy into that concept to look at Invesco as someone who can offer solutions to plug into their portfolios. Makes perfect sense.

Next up, “Goodbye 60/40. Hello 50/30/20.”:

This ad leaves me less clear. The message is direct – investors need to shift from a traditional portfolio allocation to one that utilizes more alts – but the role Invesco can and will play is not. If the ad established Invesco as a leading alternatives provider, a firm that can help investors with the 20% allocation, that would fit. However, the ad is framed with and ultimately focused on overall portfolio construction (the 50/30/20).

This ties back to the issue we raised in the robo project: what role, exactly, does an intermediary-focused (i.e., non-direct) asset manager play in helping advisors and investors construct portfolios? At this moment, for the most part, I’d argue the answer is “not much”.

Of course maybe the ad is simply the jumping-off point for more discussion, which is fine. But I do think it illustrates two critical questions for most traditional, active, retail-centric asset managers to address:

  1. Is it feasible for us to be viewed as a key resource in portfolio construction or are we too far down the road of ceding that ground to our distributors, direct firms, and new entrants like robo-advisors?
  2. If it is feasible, what is our strategy?

The rash of robo-advisor acquisitions supports that idea that asset managers believe that becoming a more prominent resource for portfolio construction is feasible and necessary. But the messaging around these acquisitions has been carefully curated to be non-threatening to the status quo (i.e., “we’re doing this to help, not challenge, advisors”). And I don’t know that 20 different asset managers offering 20 nuanced robo platforms is an outcome, even in the short-term, that any single firm should view as favorable.

So when it comes to portfolio construction and the role asset managers wish to and can play in it, “what is our strategy?” is a more pressing question than ever.

Two Thoughts on Smart (or Strategic) Beta

Posted by Mike McLaughlin on Nov 17, 2015, in Thoughts , tagged with , , , ,

A few weeks back I commented in a story on OppenheimerFunds’ move into the smart (or strategic) beta realm. Let’s be generous and say that my quote was among the more generic in the story. So I thought I’d take a second to lay out two thoughts based on points within the article.

1. Smart beta WILL be successful

The parade of managers lining up to launch smart beta strategies is a pretty good indication, despite some mixed results in asset gathering. The simple fact though is that there is a sizeable gap between the philosophies of traditional active and passive strategies. There is no reason that strategies that include elements of both shouldn’t be successful as well. The idea that these strategies are solely a marketing gimmick is disingenuous.

If the asset management industry is a (somewhat uneven) barbell with passive at one end and active at the other, I believe the eventual (long-term) outcome is a more evenly-distributed pipe where the middle has significant or even as much traction as the endpoints.

2. Smart beta should align itself with active

To some degree I’ve always felt that the “passive” label for investments is a misnomer. These are still purposeful strategies designed by human beings based on their ideas. So while the day-to-day decision-making on holdings are removed from a portfolio manager, the underlying guidelines remain very much human. These are not robotic strategies divorced from the thoughts of people.

This is even more evident with smart beta strategies, which exist wholly because people think they can improve upon (or at least offer alternatives to) traditional passive. Many smart beta managers regret the prevalence of the word ‘beta’ in the category name; even so, few push to align these strategies explicitly with active. That should (and I believe will) happen more, especially since many of the market entrants are traditional active players. If nothing else, it’s a more accurate way to present what these strategies are.

[ Image courtesy of ValueWalk ]

Are the Barron’s Rankings Bad for Asset Managers?

Posted by Mike McLaughlin on Feb 22, 2013, in Thoughts , tagged with , , , , ,

Last week Barron’s published their annual fund family rankings. As they typically do, Barron’s focuses first and mostly on one-year results, noting that most of this year’s winners “rose from the very bottom of the 2011 list”.

Did they ever. Only one of the top 10 firms from last year remained in the top 10 this year. Putnam finished first a year after placing 57th.

Putnam touted their #1 ranking in Barron's on their Web site.

Putnam touted their #1 ranking in Barron’s on their Web site.

The Barron’s list gets a lot of attention and the winners tend to use the results as promotional fuel. But as I digested the results, I started to wonder if the Barron’s rankings do more harm than good for fund families.

The volatility of the list is one damaging aspect. Besides the short-term shuffling, this year saw 2011’s 10-year winner drop all the way to 15th in this year’s 10-year rankings.

I think it’s entirely plausible that these results can lead people to question if it’s possible for managers to have a sustainable advantage. At a time when actively-managed equity products in particular have hemorrhaged money, painting a picture of randomness is far from favorable.

The other problematic aspect of the rankings is the overwhelming emphasis placed on one-year results. Managers almost universally preach long-term thinking – that it is market cycles that matter, not days or weeks or months.

Yet, when given a chance to focus on positive one-year results, many of the firms embrace that opportunity to the fullest. Most of the top 10 have done something to trumpet the Barron’s list, something that I see as counter to a central tenet of their overall marketing and brand.

I’m not saying that firms shouldn’t be proud of good performance. But I think that to a certain degree it should be promoted in the consistent wrapper of long-term thinking and results.

David Swensen and the Reality of Past Performance

Posted by Mike McLaughlin on Aug 15, 2011, in Thoughts , tagged with , , , , ,

If you read our blog, by now you’ve probably also read David Swensen’s op-ed from the Saturday New York Times. There’s a lot in there worthy of discussion, but one paragraph in particular got a strong reaction from me:

Mutual fund companies, retail brokers and financial advisers aggressively market funds awarded four stars and five stars by Morningstar … But the rating system merely identifies funds that performed well in the past; it provides no help in finding future winners. Nevertheless, investors respond to industry come-ons and load up on the most “stellar” offerings.

Let’s all say it together: past performance is not predictive of future results. True in investing? Yes. In life? No.

The reason David Swensen gets to write an op-ed for the New York Times and lead the Yale endowment is because of what he’s done in the past. Looking at the track record of anything is the most intuitive evaluation barometer we have. Ignoring it is neither natural nor logical.

This doesn’t mean the issue Swensen raises – investors unsuccessfully chasing performance – isn’t real. I just think he’s angrily, unfairly, and incorrectly casting blanket blame on mutual fund marketers and financial advisors, who generally believe in what they’re doing and try to do right by their customers and themselves.

The real enemy here for Swensen is human nature. It’s in our nature to be emotional and overconfident, and compensating for these realities will require a lot more than broad-stroke, ham-handed criticisms of an entire industry.