Study: Language Key When Discussing "Alternative Investments"

Jun 23 2015 | 9:07pm ET

Amid the growing availability and adoption of alternative investments through mutual funds and ETFs, advisors need help breaking through the language barriers to work effectively with clients to understand their investment choices and the potential benefits of a well-diversified portfolio more than ever before.

According to a new year-long study titled, The Power of Alternatives from Invesco, a leading global investment management firm, and Maslansky + Partners, a research-driven language strategy firm, nearly eight in ten investors (77%) would rather invest in, "alternative mutual funds that are bought and sold like any other fund" than, "liquid alternatives" (23%). 

"Investors are very open to hearing about how alternatives can help them meet their goals, but this value proposition is quickly clouded by words like derivatives and arbitrage," said Scott West, Head of Invesco Consulting.  "By avoiding jargon, advisors can eliminate misconceptions, improve conversations and help their clients understand how these strategies may enhance their portfolios."

The majority (65%) of the 800 investors surveyed said they are comfortable investing in Mutual Funds but less than one-quarter were comfortable investing in Global Macro Funds (24%), Unconstrained Equity Funds (23%), Hedge Funds (20%), Arbitrage Strategies (19%) and Derivatives (17%).

"Advisors should lead with the known and not with the new in helping investors to understand investment strategies," added West.  "Our research found that nearly 8 in 10 investors would rather invest in alternative mutual funds bought and sold like any other fund than liquid alternatives, yet they are the same thing. This demonstrates that investors do not have a good understanding of liquid alternatives."

Investors Like "Complements"

When asked what type of new investments they would rather invest in, 73% of investors selected those that complement the investments already in their portfolio and just 27% preferred those designed to replace some of the investments already in their portfolio.

"While institutions have used alternative investment strategies to achieve their goals for decades, more work needs to be done to ensure all investors understand their role in a portfolio," said Walter Davis, Alternative Investment Strategist at Invesco. "To shorten this learning curve, advisors should focus on how alternatives can help clients achieve their personal goals, how mutual funds and ETFs offer efficient access to these strategies and the role alternatives can have in complementing core portfolio holdings rather than being used satellite investments."

Other key findings from The Power of Alternatives study include:

Investor-friendly definitions work better when discussing alternative strategies:

  • When asked which phrase best describes an investment that does not rise and fall with the markets, just 18% selected the often-used phrase, "non-correlated" while the majority (59%) preferred, "behaves independently"; and
  • Almost two-thirds (64%) of investors would rather invest in, "funds that focus on more consistent returns," while 25% preferred, "equity funds that give up a little on the upside to get more protection on the downside," and just 11% selected the industry label, "long-short equity funds."

Advisors need to explain how they select alternative investment managers; investors prefer management teams with a long track record over brand and AUM:

  • Seventy-one percent (71%) of investors preferred an alternative fund managed by a team, "with a long track record in alternatives" over one that is, "well-known" (16%) or "that has over $900 million under management" (13%).

The Not-Top Ten List of Phrases

Based on the extensive, year-long research conducted around The Power of Alternatives study, Invesco Consulting developed the following list of toxic phrases to avoid when talking with clients about alternative investments:

  • "Derivatives"
  • "Future-proof your portfolio"
  • "Smooth equity returns"
  • "Immediately allocate 20% of your portfolio to alternatives"
  • "Non-traditional investments"
  • "Strategies usually associated with hedge funds"
  • "We can predict that rates will rise in the future"
  • "These are portfolio managers that I have carefully selected"
  • "Arbitrage"
  • "Satellite"

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