The hunt for alpha is out! Risk avoidance is in.
When money managers gaze into their crystal balls amid the ongoing capital markets meltdown, they see a very different future — one much more focused on crafting portfolios capable of ensuring their clients will be able to cover their liabilities.
“You'll see a sobering up of investors” who were chasing alpha, and a shift in the frame of reference from “we have to make more money” to “we can't afford to lose any money,” said Richard Ennis, chairman of investment consulting firm Ennis Knupp & Associates, Chicago, and editor of the Financial Analysts Journal.
For money managers, that means reconfiguring their businesses.
“The successful asset management firms of the future are being formed today,” and the ones building deeper, stronger relationships in helping clients to achieve their desired outcomes will come out ahead, said Martin L. Flanagan, president and chief executive officer of Invesco Ltd., Atlanta.
The feverish search for alpha that followed the market's last drubbing — between 2000 and 2002 — increasingly will give way to more modest, risk-averse goals. This change in direction might be good news for index funds and other traditional equity and bond strategies, but not for high-flying alternative strategies such as hedge funds, with their hefty fee structures, experts said.
The collision of a more cautious investment approach with the pressing goal of funding the retirement needs of U.S. baby boomers will force individuals and institutions alike to lower “inflated expectations” of returns created by the market boom of the late 1990s, said Tom Finke, president of Springfield, Mass.-based Babson Capital Management LLC.