As many advisors have come to know through experience, a consistent and long-term approach to investing may help pay handsome rewards for clients thinking ahead to retirement. Confirming that wisdom, Voya Investment Management has conducted extensive research into the value of investment consistency and is now sharing its findings with advisors. Recently, InvestmentNews' Evan Cooper, Executive Editor of IN's Content Strategy Studio, sat down with Jake Tuzza, Managing Director and Head of Intermediary Distribution at Voya, to discuss how his firm's research is being put to use to assist advisors who are helping clients prepare for their post-working years.
InvestmentNews: What are the challenges Voya Investment Management has seen with personal retirement clients and why is consistency – in both investing and client behavior – the solution to those challenges?
Jake Tuzza: Clients approaching retirement are challenged by the need to generate sufficient income and by the financial and emotional demands of managing portfolio risk and volatility. After doing extensive research, we found that mutual funds that scored highest in consistency — as measured by the six-factor “Consistency Lens™” that we developed and trademarked — produced higher-than-average excess returns and lower-than-average downside risk. Advisors can use this lens to help narrow the fund universe, where there is a huge variation between the returns of the best and worst funds in any category, and identify funds that over three-year rolling time periods have been able to produce very consistent returns in both up and down markets. This allows advisors and their clients to help overcome the financial and emotional concerns about having sufficient income and experiencing market volatility, which could make clients feel comfortable in their choices and to stick with their investments for the long run.
IN: How does Voya Investment Management propose finding 'consistent' funds for personal retirement clients?
JT: First, our Consistency Lens methodology uses three-year rolling periods. We believe that evaluating performance and performance characteristics on a rolling basis is better than a point-in-time approach because we accord every period the same level of importance, providing a more complete picture of a fund manager's skill over time. Rolling returns also account for the fact that clients do not necessarily invest at the beginning of one-, three-. or five-year periods, but begin or continue their investing over many different periods. Finally, trailing periods that all end on the same recent date have a tendency to treat the most recent periods as if they were more important. When you are dealing with a large fund universe where the inception dates of each fund may differ from others it is especially important to treat each period as equally relevant.
IN: What, specifically, does the Consistency Lens measure?
JT: After extensive research, testing and back-testing, we identified six characteristics of consistency: R-squared, which measures how the fund differs from its benchmark; upside capture, which measures the manager's ability to seize alpha; downside capture, which measures skill in avoiding losses when the market declines; overall ratio, which is the upside capture divided by the downside capture; information ratio, a measure of a fund's excess return and the active risk taken to produce it; and the Sortino ratio, which measures returns related to downside risk. These constitute our “Consistency Lens.” Historically, if you look at managers that have performed in the top half, their measures on these six factors have produced higher-than-average excess returns with lower-than-average downside risk. In short, we believe that using these factors in choosing a manager will help advisors more effectively separate skill from luck.
We also found that these manager significantly decreased the range of potential outcomes. As an example, in the large-cap growth space, the range of outcomes on a three-year rolling basis was anywhere from -1% to 17%, whereas high consistency managers produced a range of 9%-13%, compared to the 10% of the benchmark. Our weighted scoring system also permits advisors to emphasize those specific factors that may be more appropriate for a specific client segment or objective. For example, a retirement client in the accumulation phase probably would want to overemphasize upside capture, while a client already in retirement might want a manager better at managing downside risk.
IN: Are there other areas of retirement investing where Voya Investment Management believes consistency is important?
JT: In
investing for retirement, consistency is not only important in selecting funds, it's also critical in the emotional and behavioral aspects of the process. Owning funds that are volatile can be unsettling and frightening, and can lead to making emotional choices that seriously affect long-term results. For advisors, having a consistent approach means being able to have important conversations with clients and talk them through the rationale of why Manager A is a better choice than Manager B — and why the choice could lead to less fear, better sleeping at night and greater comfort with a fund selection whether the market is up or down. As part of our effort, we have developed resources and educational materials that advisors can tap to help in delivering the consistency message.
IN: What resources does Voya Investment Management offer to help advisors, as well as resources to help an advisor demonstrate his or her value to clients?
JT: Advisors can request a consistency review of all funds in a client's portfolio or of a fund or funds they are considering. Simply contact a Voya Investment Management wholesaler, provide a list of ticker symbols and receive a report, which includes a breakdown of where each manager is positioned on a client risk-tolerance scale of moderate, conservative or aggressive. The analysis is completely objective; if a competing fund scores higher than one of ours, we'll tell you. The advisors and broker-dealers involved in our pilot efforts have told us that the reports have added great value to their client relationships, and are a useful addition to an advisor's current due diligence process — which probably will become more rigorous in coming years in response to regulatory requirements.
For more detail on the Voya Consistency Lens™, download the white paper, Applying a Consistency Lens to Fund Evaluation.
