Momentum Partners LLC

May 1, 2009 | Ignites Q&A

Lisa Cohen is the founder and CEO of Momentum Partners.

Q. Has the interest increased/decreased for alternative investment type mutual funds?

A. The arguable failure of simple diversification as the sole risk management tool has created a significant opportunity for products that use other mechanisms to control risk in clients’ portfolios. That said, we’ve seen in some recent advisor surveys we’ve completed that advisors’ love affair with hedge funds and private equity is over. However, I do think advisors have bought into the concept of a globally diversified portfolio of both asset classes and product structures. In order to implement that, advisors need more products that offer access to niche asset classes. Further, they also need different types of exposure to well-understood asset classes, such as equal-weighted index funds and inverse exchange-traded funds.

This crisis has proven that buy and hold is not a risk management tool for today’s global market. We see some of the best opportunities right now for funds that are less correlated to core asset classes or that have some hedging characteristics. Taking a page from the institutional side of the business – global macro strategies, in which managers look at prices of all asset classes globally, are one of the more attractive approaches right now.

Tactical asset allocation (TAA) and absolute return approaches are also promising. With TAA, portfolio managers attempt to create extra value by taking advantage of certain marketplace situations – by overweighting certain asset categories while underweighting others. With absolute return, managers seek to achieve positive returns regardless of the general market direction. Target returns are often set to relative cash or inflation rates, and long and short positions are put on and off to achieve the larger investment goal. Anything that takes risk off the table is an opportunity in this market.

There is a risk inherent in some of these new products – and concerns exist over whether investors completely understand how these products perform in all market environments. We’re seeing heavy trading in ETFs and indications that advisors are increasingly turning to indexing. If you’re selling leveraged ETFs for example, you want to be sure your advisors know how “not to get hurt” as well as how to use them to grow client assets. Firms have to have the appetite for the costs and complexities involved in rolling out such products to advisors and retail investors.

April 2, 2009 | Ignites | Financial Times

By Lisa Cohen

The very mature mutual fund industry is going to need to reinvent itself in the wake of the credit crisis. The onus will be on funds to gracefully change how they do business, and to do so in a manner that sits well with investors. No less than the financial well-being of most Americans is as stake. The key ways that “Mutual Funds 2.0” will come about are as follows:

Core Competency

Each firm managing other people’s money must have a unique and fully differentiated core competency and achieve better results than anyone else. There is simply no need for me-too products. Every investor is entitled to the best product available at the most reasonable price. A product line oriented around this idea will include a handful of top-selling products focused around a core competency that are a fit for the current investment climate. Fund companies should also include a number of products on the “back burner.” These strategies will be suited to the coming investment environment. And yes, no one knows what strategy that is. Remember, that is why product management is an art, not a science.

In this environment especially, new ideas centered on core competencies are needed on the product development side of the business. Core competencies can be specific investment styles, approaches to organizing portfolio management teams, firmwide pricing structures and flagship products that can be broadened into an entire product line.

Results

Every investment shop should take a clear look at its product lineup and cut, merge or deliberately and strategically deemphasize the bottom 20% of the product set. If it’s not a center of excellence, then it’s a diversion that a focused firm — and its worried clients — can ill afford.

Fair and Reasonable Prices

The fund and advice industries need to clearly delineate what consumers are paying for. They must explain at which points in the process advice, asset management and administration fees are paid. Fund companies must ensure that each component of the cost is reasonable. Total fees must be a number that allows investors to make money over time. If exchange-traded funds, essentially a single-share-class fund, are the better mousetrap, than fund companies must figure out how to approximate that product model on legacy products when possible.

Doing the Right Thing Is Right

As proved by the growing appeal of socially responsible mutual funds and all things green and sustainable, we see one other solid booster for these types of funds. Investors currently know what the industry has always known: While invested, people’s hard-earned dollars are traveling around the world and taking all sorts of unexpected turns (auction rate preferreds, hedging strategies requiring counterparties, and so forth) in vehicles as Main Street as closed-end income funds and hedged mutual funds. We think this newfound knowledge is an excellent example of how the law of unintended consequences will drive flows to funds that take environmental, social and governance issues as seriously as they do their investment strategies.

Yes, we are living in interesting times. And fund companies can make the situation work in their favor by strictly focusing on products that embrace core competencies, revising pricing practices so investors know what they are paying for at all times and adopting a communications strategy that ensures greater transparency. If these principles are embraced, funds and investors can easily have confidence that their best days are ahead of them.

October 30, 2008 | Ignites

QUESTION:
Has the recent market turmoil created new opportunities for managers? If so, what types of managers will benefit?

Executive, Top 25 Fund Family, West Coast

ANSWER:
Lisa Cohen is the founder and CEO of Momentum Partners, LLC.

I do believe that this seismic, cataclysmic activity is going to create new opportunities, particularly for active managers pursuing the subadvisory channel. Keep in mind that today’s market downturn is worse than the 1987 recession and the dot-com bubble. If a subadvisor can’t grab the market’s upside, it faces the real prospect of getting flipped out. A boutique shop that knows its sector better than its peers will have the best shot at gaining opportunities in this environment. Those managers will be able to identify value and have a deep understanding of particular company balance sheets in specific sectors. The current climate does not bode well for managers who are driven by specific style boxes. In today’s environment, it’s more about performance than anything else; performance in specific style boxes is less of a priority.

Managers looking to grow in the subadvisory channel will have to talk about their performance in this time period. If short-term performance represents a challenge, you are going to have to drill in how your fund adds value to the investor. It’s important to talk about how your team makes decisions, how you view the world and long-term track records.