Fixed income attribution falls short

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Attribution analysis can help investment managers keep their clients, even in down-markets, said David Spaulding, president of The Spaulding Group, Inc. in his presentation on “Fixed Income Attribution: An Introduction” to the Boston Security Analysts Society (BSAS) on March 5. But good attribution analysis has been hard for fixed income managers to find. While equity managers have long enjoyed good models and software, the fixed income world is only catching up now, according to Spaulding. The Campisi model for fixed income attribution offers a solution. 

Explanation of underperformance can save the day
Some managers underperform their benchmarks, but keep their clients because of attribution. How’s that? Attribution helps them to explain what’s working–and what’s not. With that information, managers can reassure clients with their strategies for fixing things. This is a technique I talked about in “How can you report underperformance in your client letters?“ 

Equity-based models don’t cut it
But many fixed income managers create their performance attribution with the equivalent of one hand tied behind their back, based on what I learned from Spaulding. They’re using attribution models developed for equities, which look only at security selection and sector allocation. That’s a poor match for fixed income, where decisions about duration, sectors, and risk levels (ratings) are most important and security selection typically doesn’t count for much.

“If you’re not looking at duration, you don’t have fixed income attribution,” said Spaulding. That’s because the duration decision typically has the greatest impact on fixed income performance. 

Campisi model fixes problems 
The Campisi model, developed by Stephen Campisi, CFA, may help. It is an attribution model with the potential to  play the role for fixed income that two Brinson models play for equities, said Spaulding. The model views bond returns as coming from income in addition to price change. Spaulding ran through the steps in applying the model, including gathering the data, calculating the contribution effect for the benchmark and the portfolio, and calculating the attribution effect.

The BSAS audience seemed receptive to the Campisi model. But some expressed concern about handling derivatives in a fixed income portfolio. Spaulding said that assets that aren’t in a portfolio’s benchmark should be isolated and only their contribution should be discussed. However, I got the sense that managers who invest heavily in derivatives aren’t satisfied with that solution.

It looks as if challenges still remain until fixed income attribution achieves the usefulness of its equity counterpart.

If you’d like a copy of Spaulding’s PowerPoint presentation, e-mail your request to The Spaulding Group.

"Op-Ed Guidelines for The Wall Street Journal"

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The Wall Street Journal is a great place for you to get noticed. Getting your opinion piece published on the op-ed page carries cachet. Plus, it’ll make a great reprint to share with clients and prospects.

Check out “Op-Ed Guidelines for The Wall Street Journal.” Your essay should run 600 to 1200 words and be pasted into the body of your email to edit.features@wsj.com. Those words should be “jargon-free,” according to Robert Pollock, editorial features editor. The 1200-word upper limit is on the long side, so keep that in mind if you submit to other newspapers’ op-ed sections.

The guidelines don’t say this, but your essay should get to your point quickly. A busy editor may reject your essay after reading only one or two paragraphs.

Also, try for what reporters call a “news hook.” Tie your essay to something in the news.

"Institutional investing" isn’t as great as you think

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That’s what Van Kampen Investments discovered when it researched how to name a new retirement income product.

“Institutional” means expertise to financial services professionals, but it makes individuals think of hospitals and prisons, said Andrew Scherer, managing director, Van Kampen Investments, in his comments to the Managing Retirement Income conference on Feb. 10.

Van Kampen named its new product “Retirement Strategy Funds” and adopted the tag line “helping you build a better plan” under the influence of research showing that
1. “‘Retirement’ resonated better than ‘Freedom,’ ‘Target,’ ‘Lifetime’ and others.”
2. “‘Strategic’ tested better than ‘automatic,’ ‘institutional,’ or ‘customized.'”
3. “Positive messaging resonates, fear-based does not.”

Can you think of other words that mean different things to you and your clients? Would you agree that “risk” is one of those words? Please leave a comment.

Related posts:
* Highlights from the Managing Retirement Income Conference
* Notable quotes from the Managing Retirement Income Conference


Highlights from the Managing Retirement Income conference

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The stock market’s decline has changed how individuals look at retirement income. They want more certainty. That was one of the themes I took away from the first day of the Managing Retirement Income Conference on Feb. 10. The conference was hosted in Boston by the Retirement Income Industry Association.

Some other takeaways
1. Retirees–and pre-retirees–are concerned about becoming a burden on others in retirement.
2. Advisors will have to change to accommodate Baby Boomers’ lifestyle and income needs. 
Desire for certainty vs. the cost of guarantees 
The desire for certainty means that individuals are becoming more willing to give up control of their investments in return for a guaranteed stream of income, said Robert Kerzner, president and CEO of LIMRA International.

Guarantees of principal or income were a theme of many product presentations at the conference. For example, Brian Perlman, partner, Mathew Greenwald & Associates, made a case for target date funds with a guaranteed minimum account balance (GMAB). He suggested that guarantees should go into effect five to 10 years prior to retirement. Perlman said a GMAB would reassure investors and make them comfortable about investing a higher percentage of their assets in equities, which is necessary to give them a better shot at meeting their retirement income needs.

The SunAmerica High Watermark Funds offer a GMAB, according to an audience member. They may be the only such funds currently on the market, though Perlman said more are in development. These funds came up again in a presentation on managed payout funds by Juan M. Ocampo, Trajectory Asset Management, subadvisor to the High Watermark Funds.

However, said Kerzner, demand for guarantees is ratcheting up just as the credit crunch and stock market decline are forcing insurance companies to reassess their risk tolerance and pricing. Synthetic annuities may be one solution, he added. Oppenheimer Chairman John Murphy, who also chairs the Investment Company Institute, said there’s a question of how much risk a provider wants to take and at what price. 
“I don’t want to be a burden” 
Financial services firms are obsessed with their products instead of meeting people’s needs, according to futurist Bruce Sterling. Old people say “I don’t want to be a burden,” not “I want a million dollars,” he added. Sterling recommended that financial professionals seek opportunities to provide “de-burdenizing” services.

Sterling posed a dilemma to the conference attendees. If you had to choose, would you rather have a really good financial advisor? Or would you rather have Google or Facebook or social networking?

Advisors must change
Many financial advisors could do a better job of communicating with their clients. According to LIMRA consumer survey research cited by Kernzer, only 15% of respondents had been in touch with their clients during the current crisis. Two-thirds of those consumers initiated the contact. 

Oppenheimer Funds is directing some of its marketing efforts to helping advisors talk to clients. Advisors want to know how to approach client reviews and start conversations with clients, said John Murphy. More communication will raise client confidence, he added.

Ann Connolly of Deloitte Consulting said that as retirement income provide more unbundled products, the role of the advisor will be critical. Individuals will look to their advisors to assemble the right package for them. But these products can be bewildering. Advisors will need modules of advice, new financial modeling tools, and consolidated retirement management accounts.


 

To "dear" or not to "dear" in your email

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What salutation should you use to start a business email? 

  • Dear? 
  • Hello? 
  • Something else?

I typically open with the person’s name followed by a comma. Like this

Susan,

This is how 95% of my business correspondents start their emails.

Some people use “Dear,” then the recipient’s name. That’s essential for a business letter, but it’s too intimate for a business email. At least, that’s how it feels to me.

I was surprised to see that the authors of Send: Why People Email So Badly and How to Do It Better argue for using “dear.” They don’t like my approach. They say:

For some reason, people who would never in a letter write “Jim” or “Bob” or “Mr. Smith” with no introductory word beforehand feel no hesitation in doing so in an email…. But it strikes us as rude to bark out someone’s name like that, even in an email, especially if you don’t know your correspondent.”

I reserve “Dear” for my correspondence with friends. Or for replies to emails in which I’ve been addressed as “Dear Susan.” I think it’s usually appropriate to echo the salutations used by the person with whom you’re corresponding.

I don’t have strong feelings either way about starting an email with “Hello” and then the name of the recipient. If Allan emails me with “Hello, Susan,” I’ll “Hello, Allan,” back to him.

If you read my “Should you say ‘No’ to ‘Please,’ ” you’re probably not surprised to find me disagreeing with the authors of Send, as did most of the respondents to my reader poll on the use of please in emails.

So, how would you address an email to me? Would you use one of the following salutations?

  • Dear Susan:
  • Dear Ms. Weiner:
  • Hello
  • Hi
  • Hi, Susan
  • Ms. Weiner,
  • Susan,

 

"Financial services marketers must restore trust"

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In the current environment, small business “decision makers are much more likely to choose the safe choice over the best choice,” according to Gal Borenstein of The Borenstein Group, interviewed in “Financial services marketers must restore trust” in DM News. 

That may mean picking a bigger, seemingly more stable financial services provider over a smaller provider.


What you’re missing if you don’t blog

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Financial planners who don’t blog are missing out on a great opportunity to connect with prospective clients, according to “Social media in financial planning — the sweet spot and the sweet gap.” Why? Because many of your most desirable prospects read blogs.



On the other hand, if you do blog, you’re in a minority. Apparently fewer than 1% of financial planners blog, according to research from Kahuna Content.


Thanks to Bill Winterberg for bringing this information to my attention.


How to avoid "Really BAD PowerPoint" presentations

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“No more than six words on a slide. EVER.”


That’s the advice of Seth Godin in “Really BAD PowerPoint (and how to avoid it).” 


Here’s his rationale: “Communication is the transfer of emotion.” Too many words on the slide prevent you from connecting emotionally with your audience. Moreover, a PowerPoint slide shouldn’t serve as the script for your presentation.

Still, I think Godin is too tough on PowerPoint. I like the rule about using at least 30-point type on your slides. It puts a useful upper limit on the number of words you cram onto one slide. I first saw this rule in Guy Kawasaki’s “The 10/20/30 Rule of PowerPoint.”


Eaton Vance, Evergreen, and FRC on "Communication Strategies for Good Times and Bad"

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Mutual fund companies are ratcheting up their communications, as you might expect in challenging  times. I learned some of their strategies in a panel on  “Communication Strategies for Good Times and Bad” with speakers from Eaton Vance, Evergreen Investments, and Financial Research Corp. They spoke at NICSA’s East Coast Regional meeting on January 15.
Social media on the rise 
I was struck by how companies are using–or considering–communication tools such as webinars and social media that barely existed five years ago, back when I worked for Columbia Management Group. 

Social media is impacting every brand and how firms need to communicate, said Stephen J. Barrett, chief marketing officer and managing director, Eaton Vance Distributors. He suggested that you search for your company name on Facebook. (By the way, when I searched “Eaton Vance,” I found several people named “Vance Eaton,” but also a number of people who might be Eaton Vance employees.)

Barrett is thinking about how to leverage Facebook and other social media. “We need to enable people using social media networks to share our content and to use it build their own content.” 

None of the panelists’ firms are currently blogging, though Evergreen’s parent company, is involved in the Wells Fargo-Wachovia Blog, which allows readers to leave comments. 

Even if your companydoesn’t blog, you should be searching on its name in the blogosphere using tools such as Technorati or Google, said panel moderator Bill Blase of W.T. Blase & Associates. He has seen issues that companies could have “gotten in front of” if they’d learned about the issues through blogs.

More frequent internal communications 
At Evergreen Investments, Laura Fay, senior vice president, corporate communications, said the best time to connect with your employees is a time like now, when morale may be low, she said. Employees feel better if they hear frequently from senior management.

Evergreen is using the following tools for internal communications:

  • Monthly newsletter or business update
  • Quarterly summary of financial information
  • Quarterly video available on employee desktops
  • Town hall meetings, held in four primary locations and available via webinar; employees can submit questions anonymously

The challenges of faster communication
Companies need to communicate more quickly, which is pressuring them to get things approved quickly. “Out in two days and very, very good is much better than out in five days and perfect,” said Barrett. 

That’s not easy when you’ve got to win approval from both portfolio managers and your compliance department. “Getting out quarterly commentary can be torturous,” said Fay.

It’s also challenging to create communications that serve both financial intermediaries and their clients. Financial advisors tell the researchers at Financial Research Corporation (FRC), “don’t dumb it down,” but they want to share fund companies’ content with their clients, said Craig Kilgallen, director of FRC’s ADVISOR INSIGHT. That adds to the difficulty of getting compliance approval. Also, as Barrett said, “If you talk about negative convexity in a client brochure, you’re probably going down the wrong path.”


Website lessons from the Obama administration

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You can learn about good website design from the Obama administration.

Writer Matthew Battles explains how in “Extreme makeover WhiteHouse.gov edition: How should we read the new Obama home page?”, in today’s Boston Globe.

Some of the key lessons illustrated by the new whitehouse.gov website:

  • Prioritize. Put your most important information first. Remember the top half of your page will get the most attention.
  • Use active verbs. They raise the energy level of your web page.
  • Use white space effectively.