Bagel Tuesday - Fresh ideas. Toasted opinions.

One of the hoariest clichés of investing is the money manager who hits singles and doubles rather than swinging for the fences and taking the risk of striking out. I can't begin to tell you how many portfolio managers have described their investment philosophies to us in those words.

But is there still room for these singles-hitting, benchmark-hugging, stylebox-constrained "closet indexers" in today's investment world? Two prominent industry observers are taking opposite sides of this argument.

This morning's Investment News cited Scott Burns of Morningstar as saying that low-cost active ETFs could prove the salvation of benchmark-driven managers whose relative returns are otherwise eroded by fees. "They need every basis point they can get," Burns said.

Taking the opposite view is Ben Phillips of Casey Quirk, who recently wrote that industry assets will increasingly concentrate among firms that can demonstrate one of four winning value propositions: high-return active management, cost-efficient indexing, asset allocation expertise or solutions-led distribution. There's no room in his brave new world for managers who charge active management fees for index-like returns. (Phillips's full report can be downloaded here.)

Our own experience tells us that long-only stylebox managers, while not yet an endangered species, are struggling. More and more are turning to alternative products or prepackaged solutions. In fact, it's not clear that the industry's shift in the 1990s and 2000s toward "institutional-style" investing, focused on relative rather than absolute returns, was ever a good fit for individual investors with real-world needs and goals.

Will today's new investment products provide better answers? Only time will tell, but at least the industry appears to be asking the right questions.

Sometimes you just have to laugh at the Orwellian language dreamed up by bureaucrats. Here's my new favorite.

Currently, the SEC and CFTC are locking horns over managed futures mutual funds. The SEC regulates mutual funds and the CFTC regulates commodity trading advisors. The CFTC has been trying for years to extend its dominion over funds that invest in futures. The fund industry isn't exactly thrilled.

"Harmonization" is the word they've chosen to describe their effort at aligning the two regulatory regimes. To me, it looks more like a couple of rutting bull elk fighting over a cow. 

If anyone still wonders why alternatives are so hot, check out this story in Investment News:

In the latest sign of the apocalypse for active management, the largest pension fund in the United States is mulling a move to an all-passive portfolio.

The California Public Employees Retirement System's investment committee is evaluating whether the fees it pays its active managers are worth it or if paying less fees for passive management will lead to better long-term results....

“There's no room for closet indexers in an active-management shop anymore,” Art Steinmetz, OppenheimerFunds' chief investment officer said this month. “We're required to demonstrate we're worth the fees we charge every day.”

That nails it exactly. No one wants to pay active-management fees for style-box investing when they can buy the index itself for practically nothing. So how do they beat the market while they're investing in index funds? Alternatives.

The investment world is going bipolar. Passive investments are replacing active at the same time alternative investments are replacing traditional. Investors are building core portfolios from passive index funds and ETFs, while they seek their added value from non-benchmark-driven sources like hedge funds and other alternatives.

They used to call it core-and-explore. Today they call it beta-and-alpha. I call it a whole new world for investment marketers to make the most of.

We’re always listening and talking with people in the investment business, but the industry is changing so rapidly and broadly that we wanted to get a comprehensive view of what issues are keeping our clients and friends awake at night.

So we went on a 12-city, 27-brand "listening tour" of the investment industry. 

As we crisscrossed the country interviewing 60 senior marketing professionals at some of the most highly regarded U.S. investments companies, we covered a lot of ground, but more importantly, we learned a lot.

Here’s a taste of what we heard: 

Tour insight #2: “Brand” is changing before our eyes.  Investment firms have long resisted the idea that they are brands.  Today, they not only embrace the notion but are grappling with new conceptions of brand brought on by the Internet era.

“We’re moving away from the idea of brand-as-promotion to the idea of brand as a set of touchpoints and experiences.”

See all 10

The debate about the decline of the written word has been going on for a long time now.  Recently, however, there seems to be a renewed interest in the topic.  

Here’s a short list: 

“Let’s Get Visual: Marketing in a post-text world”

“People Don’t Read Anymore”

“Cisco: By 2013 Video Will Be 90 Percent of All Consumer IP Traffic and 64 Percent of Mobile”

“Steve Jobs: ‘People Don’t Read Anymore’”

And my favorite from The Onion: 

“National Essay Writing Contest Now Accepting Video Submissions”

You get the sense from these stories that not only is the written word in decline, but it will be extinct by 2030. 

Given the topic, I’m not going to drone on about the decline of the written word or give reasons for hope and optimism about the future of prose.

Instead, I just want to make a simple observation.  All of these authors don’t seem to recognize the inherent challenges, inefficiencies and sometimes ineffectiveness of a purely visual approach to producing certain types of content for different audiences.  I can appreciate an author’s naiveté or unwillingness to look beyond his or her own businesses, markets or expertise.  I do the same thing.  Given the amount of recent focus on the topic, however, I feel compelled to respond.

Also, I’m not talking about isolated industries or topics, such as investments (my bias).  I can think of a number of industries or topics where it’s not recommended and, most likely, ineffective to create a video, animation of other multimedia experience.  A few examples:

• “Animating synthetic dyadic conversation with variations based on context and agent attributes.” (From the Journal of Visualization and Computer Animation – I couldn’t find a video version of the paper.)

• “Currency Returns and Hedging Decisions”

• “Understanding Low Volatility Strategies: Minimum Variance”

• “Compliance Issues Affecting Structured Products”

I love these:

• “LIM Protein Direct Brainstem Axon Trajectories”

• “The Relation of Diagonal Ear Lobe Crease to the Presence, Extent and Severity of Coronary Artery Disease…”  The title continues, but you get the point.

I guess the question comes down to this, if you’re the type of person who's interested in these topics, would you rather watch the video?  Maybe, but more importantly, if you’re in charge of marketing this content, what makes the most sense from a business and strategic standpoint?  I’d be reluctant to recommend a video or other visual elements, beyond the graphics needed to illustrate the data for this type of content.

Maybe I’m preaching to the choir here, but hopefully you see my point.  The written word is never going away, at least not in our lifetime.  Markets may continue to fragment in a way that we can’t conceive of today.  And while this means the mass market for in-depth, academic insight and research may diminish, there will always be a need for concise, clear, humorous, articulate, etc. prose.  Without it, it’s tough to write the script.  Unless, of course, you’re watching YouTube (script optional).

With the markets in recovery mode and the recent financial crisis becoming a distant memory, it seems like a good time to reflect on what we’ve learned, if anything.

As I dug a bit deeper on the topic of “lessons from the financial crisis,” which only returned about 40 million results, the idea of rebuilding trust came up more than a few times.  I then stumbled upon a presentation that I think offers some interesting perspectives on the topic.

Titled simply “Trust,” the author, Justin Basini, argues that trust building begins with managing risk and clearly communicating them as opposed to marketing products and services benefits.

It sounds simple enough, but it’s actually a fairly radical idea given the investment industry’s historical focus on product benefits, as opposed to managing risks, expectations and discovery of clients’ needs and objectives. 

To clarify, Justin is not saying that the industry shouldn’t discuss benefits.  He’s simply saying that there needs to be a more balanced approach to communicating benefits, as well as risks and expectations in a clear and simple way.

Unfortunately, this tendency to focus on benefits, as opposed to risks, was amplified during the recent economic crisis. 

Most crises’ start with a mistake, and either move into the social conscience as a conspiracy or incompetence.  For the entire investment industry, public perception moved directly from crisis to incompetence due to the complexity of the issue and the belief that business leaders simply didn’t manage risk appropriately or didn’t realize what they were getting into.

Top-down communications don’t work right now

The question then becomes, how do you deal with it?  Many firms continue to apply a “top-down” approach to communications.  Meaning, the CEO or spokesperson comes out with the corporate approved message.  The age of top-down communications, however, is dead (at least for the time being).  Messages now flow through numerous and sometimes unexpected channels.  As a result, marketing and corporate communications need to adapt.

You must empower and arm your entire company with the right messages for partners and consumers.  This is critical because society doesn’t trust the face of corporate America – the CEO.  They’re more likely, however, to trust their peers. 

What this also means is that for the time being, the trust challenge is not solved by differentiation but rather by whom and how your message is delivered. 

Making a difference and finding what you truly believe

Companies and the entire industry also need to prove to distribution partners and investors that they’re worthy of trust.  One of the ways you can do this is by recognizing and communicating what your role is in the global economy and what your responsibility is to your community and to people’s lives. 

In other words, how do you make a difference as opposed to how are you better or different?

It sounds risky, especially given the negative market environment we’ve just experienced, and finding that right message can be difficult, but in reading another interesting post by Steve Gardner, President of Gardner Nelson + Partners it’s clear that the companies that are willing to communicate what they really believe, no matter what the market environment, will be rewarded in the long run.

P.S. As this post was publishing I received an email about John Hancock’s new “Trust” campaign.  The ads are aimed at stressing the importance of trusted advisors with one boasting, “People don’t trust the market.  People don’t trust the economy.  People don’t trust the government. But you, they trust.” 

Seems we were thinking along the same lines.

Conventional wisdom in the Twittersphere is that 1) your tweets should show your personality, 2) you should tweet often or your followers will lose interest or never notice you, 3) tweeting should lead to conversations, 4) doing it any other way is wrong. While #1-3 may reflect best practices, #4 just isn't right.

You can use Twitter as a micro-broadcasting medium.

It doesn't need to sound like a perky, helpful friend.

It doesn't need to be a conversation.

Most social media "experts" are contemplating retail brands and individuals, not the compliance-rich, institutional, intermediary-sale world that most of us inhabit. Do you really think an institutional consultant would mind the simple tweets "Q4 performance for our Small Cap fund is now posted" or "Joanne Smith thinks Latam is overlooked and undervalued", each with a link to the website? 

I hear a lot of trepidation from asset and wealth managers about getting into Twitter. But I don't think it needs to be that complicated. Of course it'd be nice to have great company personalities tweeting from company-related individual accounts, but simply posting announcements when you can is better than a void. It provides clients with another way of getting the information they need, increases your SEO, and starts giving you the experience you need to hone a strategy that makes sense for your company.

I had the pleasure of appearing on a live interactive webcast sponsored by BrightTALK and kasina last week. I was a little nervous because the last time I was on live TV was back in 1982—to somewhat disastrous effect—but the great folks at BrightTALK and the TV technicians at the studio made it easy for me.

The subject was "what advisors do online," based on new research by kasina. In my presentation, I supplemented the kasina research with some tips for asset managers in making the shift from a "dot.com-centric world" to the "content-centric world" we're in now, where users no longer reach your content only through your home page but access it directly from a constantly changing landscape of search engines, email links, blogs, social media, RSS readers, mobile apps, content aggregators and more. I also used our new AAM site (which just happened to launch that morning) as an example of how asset managers can make their content one of the main pillars of their value proposition.

You can see the whole webcast below (it lasts about an hour). I also plan to discuss this idea of the content-centric world some more in a future post.

The Wall Street Journal has taken a lot of heat lately for pumping up the news, spinning headline-grabbing stories out of the barest of threads. One of the most egregious examples came last week when it breathlessly reported about how farmers are threatened by new derivatives regulations -- but couldn't find a farmer who was affected.

Last weekend, the lead story in Personal Finance was "Congress Overhauls Your Portfolio." This alarming headline was followed by a blurb sure to attract the attention of those who may already be wary of the Obama administration's regulatory efforts:

Overlooked amid the thousands of pages that comprise the Dodd-Frank bill are major changes affecting mutual funds, retirement plans, single-stock investments and other holdings.

So what are these "major changes"? Do they really justify these scary alarums? Let's take a look inside...

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Normally an economics blogger, Felix Salmon took a detour into marketing the other day and discovered a basic truth about sophisticated products like coffee and wine:

The more you know about your beverage, the better it tastes. That’s why so many wineries put so much effort into wine tours and that’s why you’re much more likely to enjoy your bottle of pinot noir if it has been preceded by a short explanation from the sommelier of who the winemaker is, where they’re from and what exactly they’re doing. There’s really no way of telling how or whether any particular part of the story affects the taste, but the simple telling of the story makes an enormous difference.

Felix was talking about the incredible details you get nowadays from coffee roasters and winemakers. Not just where the grapes or coffee beans were grown, but what temperature they were picked or roasted at, how they were processed and even what they were stored in.

I guess you know where I'm heading with this. The same is true with asset management and other sophisticated products and services. How an analyst goes the extra mile to pick up a golden nugget of information. How a portfolio manager sifts through thousands of companies to find a stock that will beat the benchmark. How a chief risk officer scrutinizes every portfolio to protect investors' hard-earned savings.

Are these stories really relevant? Who knows. But they create a comfort level for the investor or advisor, and build an emotional connection between product and purchaser that forms the basis of a successful brand. As Felix says, "The more you know, the better it tastes."

I keep hearing stats about how many asset managers are using social media, but how are these companies really using blogs, Twitter, Facebook and YouTube?

The table after the jump shows the results of my survey completed mainly throughout March 2010.

Asset managers are taking varying approaches to using social media so there was room for interpretation. For instance, I didn’t count Wells Fargo’s Stagecoach Island Facebook page (too retail) but I did count Amerprise’s YouTube channel as a promotion of RiverSource (they feature RiverSource portfolio managers). Also, it’s not always certain that a custom Facebook page is officially sanctioned by the company.

Things are changing quickly. When I started the survey, it was pretty clear who was making an effort on Facebook, even to simply put up a page for employees. But in the last month or so, Facebook’s new “community” pages have pushed a lot of these private fan pages out of the search results. I had half a dozen in March and can only find one now.

Even more interesting, community pages have given almost every big company a seemingly official Facebook presence — whether they wanted one or not. A Facebook presence that is out of their control. More on this in my next posting.

The table after the jump shows an industry whose use of social media is very much in flux but progressing toward acceptance of it. You can click on the bullets to see how each tool is used. (NOTE: the Twitter column was updated as of July 23, 2010.)

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