Advisers discover what investing innovations are coming their way

New fintech and investments to offer new opportunities
SEP 30, 2017

Creative innovations coming out of the investment world will provide financial advisers with outstanding new tools to use with clients in coming years, such as portfolios that mimic a client's personal index. Advisers attending the premiere of a new InvestmentNews "Innovators in Investing" series, the first event sponsored by FS Investments and FlexShares, learned about these personalized portfolio indexes and other novel investment opportunities on the horizon. InvestmentNews editors led three discussions Sept. 19, kicking off the day with Kunal Kapoor, CEO of Morningstar Inc., followed by conversations with Michael Forman, chairman and CEO of FS Investments, and Marie Dzanis, head of intermediary distribution for Northern Trust Asset Management. Mr. Kapoor recommended advisers figure out how to prove their value to clients and use technology to help them do more holistic planning, including crafting personal client portfolios with better outcomes. At Morningstar, the ratings giant expects research rooted in behavioral finance will improve the investing process moving forward. "We are investing in behavioral research and putting it in our software so people essentially get nudges that prevent them from being their own worst enemies," Mr. Kapoor said. Mr. Forman described new investment opportunities. "The market has been a little bit slow to embrace alternative beta; we've seen lots of smart beta," he said. "We think there's an opportunity to bring a real fund to market where we can focus on alternative beta."
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OPPORTUNITIES COMING IN ALTERNATIVE INVESTMENTS
• Interval funds, in which you can manage semi-liquid portfolios but guarantee a certain stream of liquidity.
• Private equity has been the best performing asset class in the last 25 years, and it's time to make it available to smaller investors. Expect this as early as 2018.
• Alternative beta gives clients an opportunity to seek alternative sources of income and growth, providing more diversification and non-correlation to traditional markets.
• New real estate investment trusts, such as mortgage nontraded REITs, in which net asset value is calculated daily.
Source: Michael Forman, CEO, FS Investments

FS Investments, which has more than $20 billion in assets under management, was the first to launch a nontraded business development company, in 2009. It recently launched a mortgage REIT in the nontraded real estate space. And it's set its sights on bringing private-equity investments to smaller investors. Today private-equity funds are designed for qualified investors who have more than $5 million in liquid assets. FS Investments wants to bring the level down to accredited investors, Mr. Forman said. "We've been looking at ways to bring private-equity exposure to our clients, and we're not there yet, but we do believe there is a way to do it."
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QUESTIONS TO ASK BEFORE INVESTING IN ETFs
• What is the asset manager skilled at doing?
• What outcomes (capital appreciation, income, risk management, liquidity) is the investor seeking?
• Does the ETF's strategy work for the investor's goals?
• Can the asset manager rebalance well?
• Is the asset manager adding distinct value?
Source: Marie Dzanis, head of intermediary distribution, Northern Trust Asset Management

Ms. Dzanis said the growth in exchange-traded funds seen since they were introduced in 1993 will continue because of the instrument's advantages. ETFs are very liquid, transparent and low cost, and it's a clear and simplistic way to have an arbitrage or hedging opportunity in a portfolio, Ms. Dzanis said. They've also been more innovative than mutual funds, though she said it's more about the strategy used than the vehicle in which the investment resides. Northern Trust is a sponsor of FlexShares ETFs, which have $14.8 billion in assets under management. "If you are an asset manager and you create a product and it's in the right vehicle, and it's a very good strategy that's attractive and going to produce above-market returns, people are going to be drawn to it," Ms. Dzanis said. "The innovations we've seen most recently are that all of these products are coming out on the ETF side." Ms. Dzanis also said the lack of common language and uniform definitions in the industry causes some confusion. She noted that even the funds' tickers may not fully represent what the products do. About 25 advisers attended the live event in Chicago. On Oct. 4, InvestmentNews will feature an encore viewing of a webcast of the event from 4–5 p.m. (ET). To view the webcast, and earn CE credits, go to InvestmentNews.com/investingwebcast.
NEXT UP IN THE INNOVATORS IN INVESTING SERIES:
Focus on ESG investing. It will feature new research into this growing market.

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