Preferences change. Tastes develop over time. You probably appreciate more and different foods than you did when you were a child. You change your diet to meet your needs – foods to benefit your heart, your cholesterol, your weight. You may even have a special menu designed specifically for you by a doctor or dietitian The investment industry is seeing a marked shift towards an era where this kind of evolution and customization will be key to success.
For years, investment managers have taken alpha to mean “beating a benchmark.” Alpha, as traditionally defined, is the excess return earned above a market index through active management. The manager was given a target and expected to beat it. That flavor of alpha is now giving way to solutions alpha. This is a particular way of thinking about investing that targets specific outcomes meant to help investors meet their needs. The key is personalization in this “one size does NOT fit all” approach.
Solutions alpha means different things for different types of investors, but commonalities exist. Most solutions alpha strategies feature a multi-asset class approach that uses dynamic asset allocation and embedded risk management. For defined benefit plans, examples include liability-driven investing, risk-mitigation solutions, and longevity insurance. Defined contributions have been implementing solutions alpha through target-date and target-risk funds, deferred annuities, and diversified growth funds. The mass market of investors has sought out solutions alpha strategies like diversified income funds, inflation protection funds, and low volatility funds. Each of these solutions for each of these markets starts with an outcome (e.g., low volatility, no-hassle diversification, asset-liability matching) and develops a strategy to achieve it.
As markets move towards these specialized flavors of alpha, expect strategies that cut across style boxes. The trend may also focus more attention on passive strategies to achieve beta exposure, with “alpha sleeves” to add customization.
You can read more about solutions alpha, and other factors that will drive the investment industry in the years ahead, by downloading the report, “Investing in a Debt-Fuelled World.” This report, created by my company CREATE-Research and commissioned by Principal Global Investors, surveys over 700 asset managers, pension plans, consultants, fund distributors, and fund administrators from 29 countries to examine the challenges the industry faces from an era of low interest rates and investor uncertainty. I encourage you to visit the landing page (link here) to see the executive summary, view videos, and download the full report.
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