Unlocking Real Value Blog

Mutual Funds and Risk

Full Title: What can or should mutual funds do to counteract likely new attitudes about risk and the fear clients have about unexpected worst-case events?
Published in Ignites – An Information Service of Money-Media, a Financial Times Company
Written by Andy Klausner, CIMA, CIS, the founder of AK Advisory Partners LLC., a strategic consultancy serving the wealth management industry.

Faced with today’s uncertainty, mutual fund companies must effectively address investors’ new attitudes toward risk as well as the natural inclination to flee to seemingly more attractive investments. Most importantly, they should continue to manage as they are mandated to. Next, their marketing focus should be on counseling advisors on the types of investors and portfolios their particular offerings are appropriate for. Fund companies — as well as everyone else in our industry, for that matter — should continue to stress the importance of assuring that the clients they advise are invested correctly given their goals, objectives (particularly cash flow needs) and risk tolerance levels.

For an individual fund company, it’s crucial to clearly articulate the characteristics of the firm’s product offerings. Ensuring an advisor and end-client that a particular fund fits into a diversified investment strategy is crucial toward building and maintaining long-term relationships. If a fundstresses only performance or gets defensive in its marketing efforts in the face of alternative strategies, it will not be successful.

While it does not sound very exciting and is not flashy, stressing the fundamentals is exactly the right strategy to keep clients focused. This strategy will help reduce the likelihood that a client will seek alternative strategies that have already had their 15 minutes of fame.

Remember that the worst time to consider changing investment strategies is in the midst of difficult times such as those we face today. Frustrated by the recent failure of ―buy and hold and asset allocation- based strategies to protect assets, many investors are tempted to seek alternative investment methodologies. While success stories are rare this year, frustrated investors will naturally gravitate to them in desperation. But strategies that bet on positioning oneself to take advantage of rare events are by definition rarely successful themselves. It reminds me of Murphy’s Law — are not those investors who run to alternative strategies in the midst of uncertainty doing the exact wrong thing at the exact wrong time?

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