Holes, Not Drillbits

Posted: July 6, 2015 | by: Thomas F. McKeon, CFA

Customers don't want drillbits, they want clean, perfectly dimensioned holes.

There is an old saw in the sales game that "customers don't want drillbits, they want holes." It is a Timeless Truth and one that is often overlooked by many of us who can become somewhat hidebound about our own workflows and worldviews.

We recently had an introductory conversation with the CIO of a large managed account platform. After describing how our simple and reliable hedged strategies modify traditional equity exposures to enhance returns in most markets, limit risk, and deliver superior market capture asymmetry, the CIO remarked that "if investors want equity risk, they should just invest inequities." I had to bite my tongue.

Investors don't want equity risk any more than they want equity exposure. Those just drill bits. What investors really want is to fund their unique liabilities. While the traditional asset mix of stocks, bonds, and cash has been upgraded in recent years to include real estate, commodities, "alternative" exposures and more, there is still a strong tendency for all of us to stay in our circle of comfort and competence. As an example, the kerfuffle about "smart beta" is a result of New Perspectives butting heads with old-school mindsets and business franchises. More on that in a future blog post. Website: carede.altervista.org

As we head into what may be a protracted, low-return market environment, many new exposures will have to be considered and some will work their way into the asset mix. Our feeling is that any exposure that improves portfolio efficiency, has ample historic data to examine and can be accessed in a low-cost, liquid and transparent manner should get a fair hearing. Investors just want holes. In our evolving and adapting investment world, how they get them is open for discussion. We should all cringe when we hear the equivalent of "that's not how we do things."

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