Our previous blog post examined how the alternative asset management sector is evolving beyond family offices and HNWIs into the realm of the direct retail investor. We now consider how a manager should begin to develop an alternative asset retail investor communication strategy.
“My belief is that communication is the best way to create strong relationships.” – Jada Pinkett Smith
There are sign that the trend to alternatives is driven in many cases by retail investors’ tactical asset allocation preferences rather than strategic diversification. Such an approach is unlikely to deliver sustainable out-performance to most investors.
However investment managers have the opportunity to engage directly with retail investors when they are willing to share their insight on what can be a daunting subject.
Through educating investors about the diversification benefits, investment opportunities, market risks and liquidity constraints, managers can build direct relationships with investors.
We consider how they might frame such an approach.
Download our concise twenty-step guide to learn how an investment manager can establish a profitable and sustainable direct retail funds business through an engaged customer strategy.
Using alternative asset retail investor communication to position a brand
Alternative investment managers should craft their message to address the investor pain points of their target audience.
These are likely to include issues such as:
- How can I access alternative products?
- How can an alternative investment product help meet my investment objectives?
- What is the impact of volatility on my long-term returns?
- How much liquidity do I need and what is its cost?
- Will the management fees outweigh superior returns?
- What are the risks to my financial security?
These sorts of issues represent an opportunity for the alternative investment manager to engage directly with investors wishing to explore these opportunities further.
Through using simple cost-effective digital techniques the manager can establish itself as the leading informational resource in its chosen niche. This can generate a self-selecting audience of interested investors that over time come to know, like and trust the manager.
When the manager becomes perceived as a candid friend rather than a seller of product then they are very well situated to help the investor audience with their product needs.
Accessing alternative investment products
The retail market remains largely untapped. According to Winston Capital1: “Less than 4% of retail FUM is allocated to the alternatives asset class, with most of that invested in managed futures (to manage tail risk rather than deliver diversification).”
Alternative asset retail fund investors can typically access products through three routes:
- An allocation to alternative assets within a multi-asset product; Chris Thompson at Advance suggests that: “A mix of risk premia and behavioural bias strategies with diversification and leverage can get you to a decent return that has a low correlation with equities;” investors in such funds are typically less engaged in the management of their portfolios
- Stand alone alternative funds are being introduced by fund managers to provide the diversification benefit through a single investment; investors in such products are likely to have some understanding of the diversification benefits of such strategies
- Specialist managers providing highly focussed asset class-specific funds that deliver portfolio diversification in a specific market niche; investors in such funds may well have a higher level of interest and engagement in their portfolio management – however this is not necessarily the same thing as expertise
Alternative investment managers must also differentiate their products in order to justify what are typically higher management fees than for mainstream funds.
This is conceptually easier than for managers of more familiar products. However the investment case for an alternative investment may be more complex or – at least to the retail investor – less familiar.
This is where alternative asset retail investor communication can help build relationships with direct investors.
However this may well require a longer period of engagement in which the investor identifies how a product with unique characteristics fits in their investment portfolio.
Asset owners approach alternative investing differently from institutional fiduciaries. The latter are much more focussed upon the volatility of single investments rather than that of the total wealth portfolio.
Risk management structures in institutions are inflexible and career risk influences investment allocation. These are not issues when engaging with direct retail investors considering innovative products.
However the level of understanding of the diversification value of alternatives is limited within this market segment and hence managers must think carefully about alternative asset retail investor communication.
This represents a further opportunity for managers to share their insight in order to build trusting relationships with investors.
Alternative asset investing also provides the opportunity to profit from the liquidity premium – e.g. in assets such as private equity, micro-cap equities, mortgages and distressed debt.
This can be especially applicable to long-term retail investors who have no need for liquidity before retirement in 20 or 30 years time. Nonetheless liquidity is something that they pay for every day through the lower returns of the liquidity premium.
This is similarly an opportunity for alternative investment managers with insight to build connections with direct investors.
However illiquidity does pose an operational challenge. Chris Thompson at Advance suggests that: “Daily liquidity and pricing requirements are arguably not entirely positive developments, as some of these assets just aren’t that liquid.”
This may well impact how managers construct their holdings when operating in the retail market.
The level of management fees in the asset class has often been an obstacle to accessing the institutional market. This should not be underestimated when designing an alternative asset retail investor communication framework.
However a direct relationship with investors can facilitate a conversation that focuses around overall portfolio post-fee returns rather than nominal fee levels.
The other issue of which investment managers should be mindful is the heightened sensitivity when retail investors engage with the world of alternative investments.
The world has moved on to an extent from the traditional perception that alternative investing equals high risk. However, regulators remain sensitive to retail investors’ exposure to products that can be subject to significant short-term price movements.
An engagement strategy should be formulated based on an expert understanding of regulators’ concerns.
Retail investors are showing greater interest in alternative assets as they think about investing more in terms of meeting financial objectives, and the impact of portfolio-level volatility on long-term returns.
However there is a significant knowledge gap amongst investors. This is especially true of the growing group of direct investors who feel that the traditional investment advice process does not enhance their post-fee returns.
The investment advice value chain is disrupting, with new actors playing different roles. Managers thus have the opportunity to develop an alternative asset retail investor communication strategy that connects them with a targeted group of investors.
They can then share their insight on how alternatives can play a role in addressing their financial pain points. This learning process within a reassuring customer experience can create a trust relationship over time.
This process also enables managers to refine their products, either broader multi-asset funds, a packaged alternative diversifying fund or a specific alternative asset class investments to meet the needs of alternative asset retail fund investors.
How do you think managers can execute effective alternative asset retail investor communication?
We have created a concise twenty-step guide to how an investment manager can establish a profitable and sustainable direct retail funds business through an engaged customer strategy; please click here to download.
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1 Fairweather, A (2016), ‘What the defeat of Garry Kasparov by ‘Deep Blue’ tells us about the future of multi-strat alternative funds,’ Winston Capital, http://winstoncapital.com.au/deep-blue-and-the-future-of-multi-strat-hedge-funds/