Cutting Through the Noise - a financial blog by Bill Martin, CFA
The mutual fund industry has offered investors many benefits over the years: professional management, diversification, and market access. However, these benefits have come at a price of relatively steep fees and middling results. Unfortunately, a strong case can be made that some of the benefits of professional management have slowly eroded as mutual fund management decisions are increasingly led more by sales and marketing teams, and less by the professional investment team. The good news is that as the industry has evolved and matured, many of the benefits can now be accessed in a less-expensive format.
The following is an insider’s view of the path the asset management industry has taken over the past 30+ years. We argue that the mutual fund industry’s “golden age” occurred roughly from 1980 to the bursting of the housing bubble in 2008. The remarkable growth in assets and profits resulted from the confluence of a series of regulatory, political, and economic changes on a global scale. Furthermore the evolution and competition in the mutual fund industry over this 30-year period leave it poorly positioned for the future in many respects. Indeed, the characteristics of successful fund companies—tremendous size, aggressive distribution arms, and high cost per unit of active risk—have been at odds with requirements for investing success for many years now. The dramatic rise of low-cost, index-replicating passive strategies on the one hand, and high-cost, less liquid and less transparent hedge funds, on the other hand, are evidence of this fact. Rather than stick to tightly prescribed processes where active risk and investment professional judgment are minimized, we argue for an approach favored by the most sophisticated investors, typified by the Yale and Stanford endowments, among others. This approach seeks to maximize compound returns (that is, what the investor actually receives) on a risk-adjusted basis over time. This can be accomplished through diversifying, keeping costs down in largely commoditized markets, and seeking superior managers in less followed markets that allow for higher excess returns. In this paper, we will lay out in detail the important historical and coming trends that have and will impact investors, explaining how we got here, and where we are going.
The last three decades mark a period of remarkable growth and transformation in the financial services industry. A series of events in the late 1970s and early 1980s transformed economic and financial conditions, and essentially gave rise to the modern mutual fund industry. In 1978, Congress created the 401(k) individual retirement account, taking the burden of retirement planning out of the hands of employers and putting it squarely on individual employees. Not only was this a massive boon for corporate America, but overnight it also created huge demand for professional management and market access offered by the mutual fund industry. It’s no coincidence that the number of Americans in private industry covered by defined benefit pension plans peaked in 1980 and has been in decline ever since. Similarly, the individual retirement account, or IRA, was created in 1974, and later became widely available in 1981. Other profoundly important events at that time which continue to resonate today included deregulation of the financial industry; the end of China’s isolation and entry into the global economic system; the dramatic increase in interest rates by the Volcker Fed, effectively breaking the back of inflation; and the introduction of the personal computer that ushered in the move away from an industrialized economy toward one driven by rapid technological change and productivity gains.
From this backdrop, we saw an ensuing long, secular decline in interest rates and inflation; the increased globalization of the labor force and consumer markets; and decreased economic volatility (more modest growth and less severe recessions) all worked in conjunction with an elongated business cycle to reduce perceived market risk and increase investment asset prices. It is no coincidence that the S&P 500 went up in a more or less straight line from the early 1980s to 2000, during this period. Following this dramatic run-up, we have seen historic volatility in the wake of the dot-com bubble and 2008-09 Financial Crisis, yet the market still stands near a record high, as this is being written.
The undisputed beneficiaries of these events have been the asset management firms (mutual fund companies) themselves. Total assets under management (AUM) in the mutual fund industry have grown from approximately $100 billion in 1980 to almost $15 trillion in 2015. This does not count the rapid growth and proliferation in exchange-traded funds (ETFs), which now account for almost $5 trillion. Such spectacular growth in AUM led to a number of fad investments, diluted talent, and hubris, while the number of registered mutual funds has grown from around 500 in 1980 to well over 10,000 today. All of this rapid growth has occurred while the total number of listed stocks in the US peaked just short of 8,000 in 1997, and has since shrunk to under 5,000. There are now more mutual funds than there are stocks. Think about that for a moment. To quote one well-known observer of financial markets: The parasite is now larger than the host.
REGULATE THIS: THE REGULATORY ENVIRONMENT’S EFFECT ON INVESTMENT ASSETS
Nothing was more important to asset management growth than the creation of the IRA and 401(k), created by Congress to alleviate pension funding burdens on Corporate America. As the accompanying graph shows from Money Zine (based on Department of Labor statistics), the growth in defined contribution plans has far exceeded that of defined benefit pension accounts since the introduction of these laws.
Plan Participation Rates
According to surveys conducted by the U.S. Department of Labor's Employee Benefits Security Administration, participation in defined benefit plans peaked back in 1980. At that time, there were 30.1 million participants in these retirement plans. Over the next 30 years, participation decreased by nearly 40%.
Not surprisingly, participation in defined contribution plans increased 281% from 18.9 million to 72.0 million participants over that same timeframe. This increase is attributed to both the scaling back of defined benefit offerings by employers as well as the rapid rise in the popularity of 401(k)-type plans.
Prior to the increased popularity of the IRA and 401(k), traditional defined benefit pension plans reigned supreme. These plans were run by employers and offered few choices. This approach largely bypassed the mutual fund industry and usually delegated investment decisions to the company’s treasury department or a big bank’s trust department and could often be over-reliant on company stock. The movement from traditional pension plans to defined contribution plans (IRA, 401(k), 403(b), SEP IRA, etc.) brought HUGE profits in the form of fees for the mutual fund industry, along with a dizzying array of choices for investors. Some of these changes were good, and some not so good for individuals. What we can say for sure is that these changes completely remade the retirement landscape for the average American worker and jumpstarted the entire financial services industry.
Altos believes… Because the responsibility for retirement savings has slowly transferred from the employer to the employee and the participation decision has become voluntary, the retirement savings/benefits have actually declined for the individual. The positives from moving away from the pension plan system have flowed to the corporations through lower costs (the same can be said for sharing costs of health care). The benefits of increased investment choices have not offset the commensurate loss in individual retirement savings contributions, thus putting the burden of an aging workforce with underfunded retirements on the increasingly hollowed out labor force. In most cases, individuals lack the investment acumen to make the appropriate investment choices to match their risk tolerance, investment horizon, and savings needs. In other instances, investors may get set up properly, but end up bailing out of their plan after a big drawdown (at just the wrong time), and then feel discouraged and avoid making future decisions altogether. This is where and when an experienced advisor can help investors stay the course or, better still, use market turbulence as an investment opportunity.
DON’T BOX ME IN - CONSULTANTS AND FUND RESEARCH & RATING FIRMS
With individual investors increasingly responsible for their own retirement success, new services sprung up to advise individuals on their investment decisions. One such service was Morningstar, who created so-called “style boxes” to help investors better categorize and understand what was driving the performance of their investments. Morningstar helps investors view mutual funds through the prism of size and style, utilizing a three-by-three matrix with small-, medium-, and large-capitalization stocks on one axis and value, blend, and growth styles on the other axis. This matrix placed every domestic equity mutual fund in any one of the nine boxes.
Given the proliferation of mutual funds in the period since 1980, the need to organize and categorize funds was clear, and for this service Morningstar is to be commended. But this advent may have also had an unintended consequence of stultifying and “boxing in” good asset managers. Consider the interaction effect between style purity and the newly minted “investment consultant” community. The consultants were hired by large 401(k) plans and other large asset pools to help pick the best funds for each style box. Since money talks, and 401(k) plans became the largest recipients of new money inflow, these consultants gained considerable power over the allocation of investment dollars between mutual funds. The style box system made allocation simpler and easier for consultants to understand and explain. As a result, the mutual fund companies segmented each of their funds into a box to follow rigid investment processes. Fund managers were strongly discouraged from moving to another box or deviating from a stated investment process, regardless of prevailing market conditions. As a result, the value of an investment manager’s stewardship to identify the context around when a process is likely to be effective has been eroded in exchange for simplicity of messaging.
The consultant community wanted to understand a mutual fund company’s process and expected them to stick to that process, even if the fund manager himself believed their proprietary process may have been out of step with current market conditions.
The following is an excerpt from an article by Alpha Architect titled Even God Would Get Fired as an Active Investor:
"… consultants say they’re counseling clients in two ways. One is simple patience. The other is imparting a more sophisticated understanding of a particular strategy’s role in their portfolio. That means clients shouldn’t necessarily be troubled when a strategy performs poorly, but rather they should worry when returns are out of whack with what the manager said to expect", according to Steve Foresti, CIO at Wilshire Consulting. “It all comes back to education and understanding the whole investment process and what it is that’s driving the risk premia investors are trying to collect.”
We highlight this paradigm to show consultants’ views of mutual fund returns. Consultants wanted to be able to understand and explain exactly how a fund will perform in relation to all market movements. Therefore, they prized consistency of process and style purity above all other traits. If a manager was in the large value box, for example, and the other funds in that space declined, his fund also ought to have declined. Otherwise, in the immortal words of Ricky from “I Love Lucy,” you got some ‘splainin’ to do! The “active” mutual fund manager has become beholden to a narrowly prescribed process with little range to exercise his investment acumen or expertise with changing market conditions. In short, active managers have become less and less active over time.
The consultants also wanted to bring down a fund's risk relative to market benchmarks. Again, the goal of this exercise was to increase predictability of performance relative to a given market index or style box. Bringing down risk usually brings down returns. Since the mutual fund management companies were loath to bring down fees… investor returns got squeezed. Hard to imagine legendary investors like Warren Buffet, Peter Lynch, or Bill Miller would have been as successful as they were had they committed to stay within a box and simply harvest a “risk premia” when it was in style.
A dirty little secret… statistics show that consultants are no better than the little guy at picking asset managers. Both tend to buy five-star funds after they outperform and sell them after they underperform and become three-star funds. This approach tends to “book” both the higher fee offered by active management as well as the poor performance period of a fund’s performance contour.
Altos believes... over the past 30 years, the impact of style boxes and investment consultants has effectively stacked the deck against investors… Not just against small investors, but against all investors. The decline in net investment returns has resulted in increased competition from two relatively new animals in the investment ecosystem, the hedge fund and the index fund (or exchange-traded fund (ETF)).
HEDGE FUNDS: BIG RISKS/BIG PAYOFFs with BIG FEEs FOR BIG INVESTORS
First let’s discuss hedge funds, which are not pinned down by style boxes and remain free to go anywhere in pursuit of higher returns—and fees. Hedge funds contrast with typical registered mutual funds not only in process and fee structure, but in other important dimensions as well. For example, there is typically less liquidity and transparency in hedge fund positions. Crucially, many hedge funds seek to provide the highest risk-adjusted return, rather than absolute return. Indeed, the name “hedge fund” connotes that managers are actively seeking to hedge risk. Contrast this with a typical mutual fund whose risk must match that of the market, give or take a few percentage points. Hedge funds also typically give primacy to the investment decision, and are much less concerned about sales and marketing dynamics. So much so that many successful managers often end up returning client money at some point and only continue to manage the partners’ capital.
The hedge fund vehicle has often been looked upon derisively, as ‘carried interest’ made its way into the political discussion. Plus, the fees are onerous when the results don’t meet expectations. Nevertheless, this type of investment entity has attracted the most talented asset managers, and is where investors get the best bang for the buck—even after higher fees. Hedge funds typically demand 2% annual fees and 20% of the profits, are generally available only to investors with liquid net worth greater than $2,000,000, and have minimum investments above $250,000. Additionally, hedge funds usually only allow liquidity once per quarter with the request being made 30 days in advance. This liquidity feature provides protection for the remaining shareholders, as in the film “The Big Short”. In that film, had investors been allowed to redeem at the wrong time, the big gains would not have been realized. Those really big gains were only available in a hedge fund format. Of course, the goal of a long holding period and limited liquidity is to provide hedge fund managers with broad leeway to pursue their investment objective. Ideally, then, hedge fund investors will often be compensated for this lack of transparency and liquidity.
Altos believes… Like in all walks of life, there are good and bad hedge fund managers and a select few very good managers. The really good ones more than compensate for the fees paid by the investor. Specifically identifying hedge funds with excellent track records and proven and flexible processes offers good risk/returns for certain high net worth investors. Hedge funds can be an excellent source of excess returns given current economic and market conditions— GDP growth looks muted going forward, stock valuations are comparatively full, and market volatility is likely to increase. Due to our industry contacts and Advisory Board members, we can identify select hedge fund managers with whom we place and monitor investments.
INDEX FUNDS AND ETFS TO THE RESCUE
The second group of animals that emerged from the declining investment return climate were the index funds and ETFs that lay on the opposite end of the fee and value-add spectrum from the hedge fund. An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. This investment vehicle offers market access, typically at a very low fee. The defining feature of these vehicles is that they offer investors passive exposure to security returns as opposed to active management. The ETF market continues to gain market share as professional mutual fund managers continue to struggle to beat passive benchmarks after transaction costs and fees. The Russell 3000 index ETF is an example of these types of vehicles. This ETF offers the exact returns of investing in the top 3000 stocks in the US market using a market capitalization weighting scheme, at a cost of about eight basis points (a basis point equals 0.01%, so eight basis points equal 0.08%). There are also more customized and extremely targeted ETFs, such as an ETF that invests only in companies with growing dividends or a specific industry. These more customized ETFs offer construction challenges and are not as straight-forward as basic benchmark investing, so the fees may climb to as high as 40 basis points, though this is still noticeably below standard mutual fund fees of 0.75% to 1.50%. The advantages that ETFs offer in certain markets is starting to have an impact. The chart below created by the U.S. Department of Labor demonstrates that ETFs have grown at more than three times the rate of standard mutual funds, while hedge fund asset growth falls somewhere in between. These data end in 2013, but antecdotal evidence shows these trends have only accelerated in recent years.
Altos believes… We want to be very thoughtful and considerate with respect to managing client expenses. In pursuit of a client’s investment objectives, we may utilize both high- and low-cost vehicles commensurate with their potential reward and role in client portfolios. As such, we expect to utilize ETFs as an efficient means to access segments of the market that are largely commoditized with few value-add opportunities. Examples may be to gain market exposure to large-cap global markets and most fixed-income markets. We also see a use for ETFs in certain special cases, such as “rising dividend” funds or targeted and opportunistic exposure to investment styles such as value versus growth, or large versus small stocks, or to capitalize on investment themes such as tech, Asian productivity gains, aging population, or cyber security.
WARREN BUFFET’S BERKSHIRE HATHAWAY… ONCE UPON A TIME
To this point, we have tried to make the case that the classic mutual fund industry is severely challenged by comparatively high management fees and low value add in an investment vehicle adhering to tightly prescribed investment parameters regardless of market conditions. The reasons for these deficiencies are many, and include the ascendance of sales and marketing regimes both within and beyond the mutual fund companies themselves. These conditions have given rise to growth in low-fee, low-value-add ETFs on the one hand and high-fee, high-potential-value-add hedge funds on the other hand. Next, we want to provide a real-life example of how it can be beneficial to deviate from style box and process constraints when attractive investment opportunities present themselves. Finally, we close with a discussion about size and the advantages of comparatively small, nimble boutique managers over their larger brethren.
Warren Buffet and his flagship conglomerate Berkshire Hathaway successfully demonstrated what could happen when asset managers are not confined to a style “box” by Morningstar, consultants, and mutual fund marketing and management teams. Consider that Warren Buffet was long hailed as a value investor. He was willing to take big risks in large positions of individual companies. He was willing to utilize leverage, and to engage with private company management teams to help maintain or improve the company’s advantage. However, Warren Buffet did not always stick to a “style” box. One of his most profitable positions of all time was his purchase of Coca-Cola (KO) in the 1980s. KO was not a value stock, but Warren contended it was cheap based on where he saw the market going… not on historical measures. This would not fly in today’s style box world, nor in a world where a consultant expects all of a mutual fund’s investment positions to fall within a tightly articulated stock selection process.
It would have been a shame had Warren not found early success and not become bigger than the fund rating companies early on in his tenure. It was indeed this early success—his ability to define attractive investment opportunities for himself and his clients without regard to size, style, or other constraint—that allowed him to be considered a legendary investor. His early success may not have been possible in the more segmented mutual fund environment of today.
Altos believes… Indeed, Warren Buffet was able to go anywhere/do anything, including invest in private companies to achieve his success. However, we believe there is also a cautionary tale in his Berkshire experience. Returns over the last decade or so lead one to question whether Berkshire has gotten too big—perhaps too big to invest without leaving a trading footprint, or just too complex to manage efficiently. Not to mention the obvious succession issues associated with an 86 year old Investment Chief. Consider that in the 30 years ended 2007, Berkshire Hathaway outperformed the S&P 500 21.3% versus 11.8% per annum (according to Bloomberg). This actually compounds out to a whopping difference of 4700% versus 828%! The power of compounding and superior asset management cannot be overlooked. However, since the end of 2007, as AUM and complexities increased at Berkshire, we have seen a bit of a reversal. From 12/31/2007 to 2/29/2016, Berkshire has underperformed the S&P 500 by 1400 basis points, 43% versus 57% on a cumulative total return basis. This is but one prominent example of a phenomenon documented in academic and industry research—it becomes harder to outperform as AUM increase. The good news is that there are still outstanding, comparatively small investment managers that have taken Warren’s example and stepped out on their own. Which leads to boutique investment firms.
Much like Warren Buffet and unlike large mutual fund companies, boutique firms do not have ascension, succession, or survivorship issues. At large mutual fund companies, it is very common for successful mutual fund managers to be moved to larger and more profitable funds within the company after a period of successful outperformance. This often leads to manager turnover and a lack of team cohesion. Eventually, successful managers often leave those large mutual fund companies to launch their own boutique firms or hedge funds. Boutiques fund firms tend to have much more freedom than typical largely distributed mutual funds because they tend not to play the style box game to help raise assets. Investment focus as opposed to marketing focus can make a huge difference.
Altos believes… that boutique investment funds tend to be more nimble than their largely distributed brethren. In most cases, these strategies can still invest anywhere, outside the “box” so to speak, and thereby stand in direct contrast to large mutual fund companies. We feel there is a role for boutique managers for our clients, particularly in markets that have a history of offering large opportunities to beat market-based benchmarks. These investment areas include tactical asset allocation funds, small-cap funds, and emerging market funds. We believe that in certain instances the best talent in the industry has landed with these boutique funds.
The latitude afforded these managers, alongside an “investment first” culture as opposed to a culture based on asset gathering, helps explain the long term superior returns offered by boutique investment shops. As described in an article by Bloomberg and an AMG press release… first and second decile boutique funds respectively best their relevant benchmarks by over 10% and 5% annually. This outpaces more mass distributed competitor funds by multiples and more than pays for investor fees.
It is important to understand how to buy and sell these funds, rather than to simply identify them. The Social Science Research Network published an article by 3 professors from Caltech, UCLA and Penn State that identifies a number of typical mistakes institutional and individual investors commonly make when selecting a mutual fund. Simply put, buying after a prolonged period of outperformance and having high Morningstar ratings typically leads to periods of underperformance, and vice versa. It takes discipline, but it is critical to identify a solid process and a team that knows that their approach may not always be in style...and most importantly, be willing to do something about it by re-shaping the contour of their investment process. This leads to long-term outperformance, even after fees. After spending more than a quarter of a century in the mutual fund management business and either participating in a panel discussion or competing in a finals presentation with these managers, we feel we have the necessary insights to lead this search.
GROWTH VERSUS INCOME
Next, we turn to the trend toward targeted income investing. This trend is a result of very low interest rates, as a result of the Federal Reserves asset purchase program (e.g. Quantitative Easing - QE) that benefit investors, but punish savers. Income investing was pushed as a necessary style of money management, particularly for investors in or near retirement that are living on a fixed income. Arguably, income-focused investing was an investment product created by the fund industry to target older investors that tend to have more significant assets (from which the industry can take fees). The fad of fixed-income focused investing came about when the industry began to sell the idea that an investor on a “fixed” income needed to achieve this target income amount from bonds or dividends, often at the expense of growth and stocks. It also should be noted that the rise of income investing coincided with the proliferation of debt in America (repackaged and sold as asset-backed securities) and the abundance of fixed-income securities that the government and industry needed to sell. Finally, management fees present a challenge for fixed-income investing in general and income investing in particular. Low levels of volatility and interest rates at present mean it is very hard for fixed-income mutual fund managers to earn back their fees.
Altos believes… In contrast to specific, targeted income products we believe it makes more sense to adopt a sophisticated, institutional approach focusing on total growth and capital preservation. A winning strategy focuses on the total portfolio throughout the entire investment cycle, rather than just the amount of income thrown off at any one time. Then, when one needs income, taking distributions from the larger asset pool can offer more flexibility with less risk. This is a very institutional approach to providing income distributions, similar to what is seen from large endowments, such as that of Stanford University, or a public pension plan, such as Calpers.
We believe the best way to manage income needs is to achieve the best risk-adjusted after-tax returns for our clients in every investment environment. This strategy keeps the horse in front of the cart by outpacing inflation and avoids the current problem of “yield grab” in low interest rate environments. Yield grabs tend to reach for higher yields than market available rates, while taking on more risk, and with less diversification than the investor may realize. The problems associated with pursuing higher yields will become apparent in a rising interest rate environment or the next recession.
To be clear, there absolutely is a place for fixed income (bonds) in an investment portfolio, but the benefits come more from diversification, capital preservation, reduced risk, and potential price gains when interest rates are declining. Fixed-income securities are often a great compliment to equity securities. However we are dubious about the merits of an income-only portfolio, or investing to yield targets, which can lead to investors unintentionally acquiring credit risk or interest rate risk inconsistent with their goals and risk tolerances. Regardless of the specific role fixed-income securities play in a portfolio, we believe strongly that this asset class should be accessed in a cost-effective manner.
THE FUTURE OF THE INVESTMENT ADVICE INDUSTRY
Congress is intent on helping small investors and providing confidence that the financial deck is not stacked against them. Lawmakers are putting the onus on the advisor to act in their client’s best interest in a fiduciary role. This will be evaluated on a net return (after fees) basis. As such, if advisors are charging fees for products, they need to demonstrate that their advice is worthwhile or they will be subject to penalties. The regulatory emphasis will be on the retirement plan advisor to allocate investments that maximize return versus risk and keep costs low. In general, the market is moving in the direction of the fiduciary role that has always been the cornerstone of the (RIA) Registered Investment Advisor.
In particular, Congress is not happy with the large fees that mutual fund companies charge for relatively low returns. As such, they are tightening the reins on investment advisors by increasing their fiduciary responsibility. This will drive many “old boy” transactional brokers (e.g. Merrill Lynch and Morgan Stanley) to change their business model and offer opportunity for objective and independent fee-based advisors that find low fee investments (such as ETFs) or funds that outperform over the long terms….i.e. boutique shops!
To its credit, the CFA Institute, the leading organization run by and for investment professionals, has long had a strong ethical component in its charter, by emphasizing integrity and best practices in the behavior of all its members. The very changes Congress, the SEC, and Department of Labor are seeking to implement have long been practiced by CFA charter holders, of which this author is one. As a result, our clients can rest assured that we always put our investors first and operate to the highest ethical standards.
THE ASSET MANAGEMENT ADVISORY INDUSTRY RESPONDS
Automated asset allocation models (robo-advisors) are the traditional asset management advisory industry’s response to Congress’ tighter fiduciary laws. The benefit of robo-advisor tools is that they help simplify a concept that can be complicated to the novice investor. Robo-advisor tools also help to rebalance risk as markets move. These tools are taking concepts that professional investors have used for years and putting them in the hands of individuals. They can be beneficial if used properly and by the right person. However, it is also true that the tools are generally created by and for the benefit of the big brokerage shops by drawing new assets to their firm, or retaining current assets that otherwise may be seeking out lower-fee solutions.
Altos believes… Automated investment solutions have a role in portfolio allocation. However, one must keep in mind that robo-advisor models are based on historical regressions over-layed with correlations of assets and asset classes. As a strong user of these types of models for over a quarter of a century and an early adopter of this technology, we know these models work until they don’t. Said differently, they do a fabulous job of providing a path when markets are behaving “normally” and an investor doesn’t really need help. The other side of the coin is that these models lead investors to a false sense of security and can really do damage during times of market stress, as was the case in 2007-09. Within the institutional asset management industry, optimizers such as these are known cynically as “error maximizers” and experience “fat-tail events” during times of financial stress. They will tend to lead to an extreme and incorrect solution. Therefore, we feel it makes sense to have someone at the helm that understands the inputs and the instruments when navigating a storm. Altos will use these types of tools to provide analysis for our clients. But we will also use our market experience and understanding of context to avoid the pitfalls that ultimately arise during times of market stress.
That’s a wrap…
The investment arena has undergone tremendous changes over the past three decades. With so much at stake and continued advancement in financial technology, we can expect the industry to continue to evolve at a rapid pace. We feel in some ways that the scales are tipping in favor of the small investors in relation to access to information and investment tools, as well as a more investor-friendly regulatory environment and emphasis on cost containment. At the same time, however, expected investment growth rates are clearly compressing from that to which investors have become accustomed based on historical returns. This disconnect between investor expectations and market realities as the baby-boom generation moves into retirement will likely lead to increased market turbulence in the future. We shall leave this topic for the basis for our first seminar series scheduled for the fall.
In conclusion, we hope we have laid out the path to attack the investment markets through targeting the right product types within the right market segments and proper pricing. We continue to believe that it is possible to identify superior asset managers by knowing where to look, knowing when to accumulate, and knowing when to taper. We hope we've identified ways for investors to successfully navigate the changing investment landscape by; using the benefits of financial technology, while avoiding some of the pitfalls to create a risk- and time-horizon appropriate portfolio, and sticking to the simple tools of boutique mutual funds and cost-efficient ETFs, while mixing in some alternative investments that provide downside protection or market-beating opportunities. Regarding the topic of downside protection and creating a smoother performance contour... that's fodder for future discussions. We look forward to regularly diving into the topic of risk management and “taking the market’s temperature” through this blog. Thank you.