Active Management Proves Its Superiority!
The past year has clearly shown the superiority of active management and has also focused a bright light on the potentially fatal flaws of passive buy and hold. This is a great opportunity for NAAIM members to get out the message of active management and grow our businesses.
Everyone knows that the great American investment creed is ‘buy low and sell high”. But few stop to think that selling is an integral part of the creed. Few investors, and sadly, few financial advisers ever consider how to defend a portfolio’s value in a prolonged market decline. They have no plan for selling. They think only of buying and not much beyond that.
Some Wall Street institutions love to tout buy and hold because it is simple and easy to sell to unsophisticated investors. It also encourages investors to leave their money in the hands of these same Wall Street firms who must have investor money to work with because it is the raw material of their profits. The worst thing an investor can ever do to Wall Street is sell and take their money out of that system. So naturally, institutions resist the idea of ever selling.
NAAIM members have long known Wall Street’s dirty little secret – that buy and hold can work well, but only about half of the time. And the other half can be a disaster if one is not prepared for it as many Americans are finding out the hard way.
Often, the public will invest in mutual funds for the “management”. They think a fund manager will keep their money out of harm’s way, without appreciating the limitations of prospectus limitations. How many prospectuses have wording such as “normally invests at least 80% of assets in ___”? Probably thousands of mutual fund prospectuses are worded this way.
What this really means is that even if the manager sees a train wreck unfolding in the stock market he cannot get more than 20% of an investor’s money out of the decline, and is obligated to leave 80% of it at risk.
This is really the service opportunity that many NAAIM members have seized upon for their business model. We bridge the gap between want investors really want – defense – and what Wall Street really provides given their structural and cultural impediments.
In the wake of the crash of 2008, the public is craving safety in an increasingly unsafe investment world. The basic safety mechanism for investors and advisers has long been diversification.
Passive asset allocation and the Nobel Prize winning Modern Portfolio Theory are based upon the principal of diversification at two different levels. Across asset classes (own stocks and bonds, not just stocks), and within asset classes (own a bunch of stocks, not just one, lest it turn out to be a Fannie Mae). Each level of diversification brings with it added degree of safety.
NAAIM members have the ability to provide investors with an even higher level of safety than they can get from ordinary investment firms. We can offer them a third level diversification – diversification by investment strategy. If you want to make a point of this issue, ask a prospect how many investment strategies they can name. 9 out of 10 will draw a complete blank. And 9 out of 10 have taken devastating losses in the past few months.
This is the group we need to reach out to. This is the group than needs our services.
A great analogy NAAIM members can use to put their skills in perspective for a prospect is to ask if the person is familiar with poker. Anyone who is familiar with the game, the vast majority of folks, knows that three of a kind beats a pair. But to play poker for high stakes win consistently takes a whole different level of knowledge and skill. That is the level of expertise and know-how that NAAIM members bring to the table.
We are in the sweet spot of the market right now. This is when NAAIM members thrive. The public is desperately seeking answers, and we have them. Our challenge is how to efficiently get the word out.
Side bar articles
Marketing CRAM: Your survey responses consistently tell us that you want to learn how to grow your business and have more opportunity to network with other members. CRAM stands for Cultivating Relationships Among Managers, and the focus of the February CRAM is just that: How to Grow Your Business.
These smaller conferences are great for getting to know other advisers and compare notes on challenges and solutions. Mark your calendar for two half days of intensive marketing work in Houston.
The NAAIM Index: I mentioned elsewhere that active management is proving its superiority over buy and hold in this market but proving this point has always been elusive. The industry has never had hard data with which to refute the Wall Street assertion that active management does not work. Our new NAAIM Index of Actively Managed Funds is going to be a way we can finally prove it to the world.
Our Index has been developed from the 27 mutual funds run by NAAIM members. For a fund to be considered the manager must be a NAAIM member, so this could be a mechanism to bring some new talent into NAAIAM, too.
The preliminary numbers from our 27 fund index, clearly show the Index beating the S&P 500, so the concept looks valid. Ron Rowland has a committee working on the final structure and display of the Index. Stay tuned for the details.
The NAAIM Prize: NAAIM will soon be publishing a request for academic papers supporting the thesis that active management is superior to passive. We will present three prizes at a dinner, Saturday night, May 2, 2009 just prior to the NAAIM Uncommon Knowledge conference in Denver. The top prize will be a cash award of $10,000. This idea was introduced by Jerry Wagner and he is spearheading the project.
Uncommon Knowledge, NAAIM’s national conference is coming up May 4-6th, 2009 in Denver. It will be followed by a half day focus session on Alternative Investments, and of course we will have golf and fishing on Sunday May 3rd. This is NAAIM’s premier event, so mark your calendars for May 2-6th so you can take it all in.