Advisor Education Is Key To Alternative Funds’ Success

By Saadiah Freeman
With economic and political uncertainty creating ongoing instability in the markets, leading mutual fund companies are recognizing the need to move beyond traditional products and investment approaches. Two headlines in this week’s financial press shine a spotlight on the changing landscape of asset management: “Just 17% Of Big-Cap Funds Beat S&P 500″ and “Spate of New Absolute-Return Funds Hit the Market”. In order to succeed in this environment, firms not only need to create innovative products, but also need to educate advisors effectively on how this new breed of products can help them meet their clients’ needs.
Historically, well-understood products – in particular large-cap domestic equity funds – have formed the backbone of major asset managers’ product lineups. However, over the past several years advisors and investors have become more and more disaffected with mutual funds’ offerings in this space. Last year’s lackluster performance by the vast majority of large-cap mutual funds is unlikely to help reverse this trend. Continuing sideways markets have raised concerns that traditional strategies may not create the capital growth needed to finance investors’ retirement needs. In the wake of the credit crisis, many advisors’ confidence in their own (or their home office’s) abilities to design robust investment portfolios for their clients also suffered a blow. In response, advisors are increasingly looking to alternative funds to help them address their clients’ investment requirements. Morningstar data indicates that, as at the end of 2Q 2011, 40.7% of advisors had assets in alternative funds, compared with just 26.9% at the end of 2Q 2009.
Mutual fund firms are increasingly recognizing the appeal of alternative strategies to advisors, as evidenced by the fact that two new absolute-return funds have already been launched this year (by John Hancock and Schroders). However, as more and more alternative products hit the market, firms that are able to explain how these products work – and more importantly, articulate how advisors can use them in client portfolios – will have a distinct advantage over firms who simply release products and leave advisors to figure things out for themselves. The dramatic growth of the ETF market in recent years illustrates the value of effective education, with leading players investing significantly in initiatives to inform advisors and investors about the products and the benefits they can deliver – last week’s ETF Virtual Summit ( being a case in point. As mutual fund companies expand their product offerings into the alternatives space, engaging and high-quality educational materials will be key to winning over advisors and capturing market share.

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