By Timothy Reick
Chief Executive Officer
Liberty Street Advisors, Inc.

For financial advisors seeking to build a competitive advantage, niche-oriented mutual funds offer effective differentiation strategies. Discerning prospects and clients are not attracted to portfolios masquerading as closet index funds—approaches that they could manage themselves. Instead, niche funds managed by boutique investment managers with differentiated strategies can help advisors broaden their appeal and help investors further diversify their allocations.

Niche funds typically feature investment managers who excel at managing a specific strategy. The strength of distinctive funds from boutique asset management firms works against the trend of fund-megaplexes, where generic teams of managers may play musical chairs with a large line-up of funds. These funds may blend into one another because there are not many factors that distinguish, say, one international equity fund from another fund, or from an index.

Building a line-up of similar funds does not demand much expertise. Many investors have experienced iterations of this process. What they may prefer is working with an advisor who understands their unique circumstances and goals and can build a targeted portfolio that includes distinctive funds with strategies that compliment core investment holdings.

Investors and advisors who seek differentiated funds often look to unique asset classes managed by expert managers with long-term track records. Today’ economic, investing, and political climates mean that investors expect more from their advisors. Niche funds can help meet that expectation.

NICHE FUNDS MAY ADD VALUE TO ADVISORS’ PORTFOLIOS

What niche funds share in common are managers who excel at a specific strategy. The best boutique asset management groups stick with their knitting, instead of adding on more funds and asset classes in an attempt to be all things to all people. Boutique fund firms and the niche funds they champion are often passionately devoted to a core focus.

These funds may thrive because they offer expertise in a narrow area at a time when asset class correlations are growing. To earn their keep with clients, advisors must continually prove that they offer a value-add. That value-add doesn’t necessarily have to be superior performance—although that doesn’t hurt. Minimizing downside risk is an attractive differentiator, as are differentiated income generating portfolios.

Unfortunately, distinctive funds may be getting harder to find. That’s because major wirehouses have generally been cutting their fund line-ups to streamline their offerings. Instead of providing variety, many wirehouses have historically been standardizing their fund line-ups and performing more due diligence on the funds that they retain. They often do not see the value of offering relatively smaller, off-the-radar funds, and instead focus on larger fund families with significant assets under management.

Advisors and Investors can run screens in Morningstar, seeking the best-risk adjusted performance over a certain period of time in desired asset classes. But there’s a catch to this approach—if you do not know what you are looking for, you are not going to find it.

That is where finding a platform that features a distinct line up of differentiated funds can help. Such a platform can offer strategies that simplify the job of fund selection and portfolio management.

THE ADVANTAGES OF BOUTIQUE FUNDS FOR ADVISORS AND INVESTORS

When prospecting for new clients, it is important for advisors to demonstrate why they may be a better choice than the other firms down the road. Using niche funds as a differentiation tool offers a number of advantages:

Showcases fund-selection abilities

Intelligent fund selection for specific reasons may offer an adviser the opportunity to discuss the importance of fund selection and their individual selection criteria. Many investors believe that they can select their own funds, so why should they pay an advisor to do it for them? Sharing expertise around fund selection can help assist investors in their decision-making process.

Adds distinctive attributes to investor portfolios

Moving beyond generic funds, advisors and investors can add distinctive attributes to their portfolios with niche funds. Perhaps a core strategy involving stocks and bonds can be complimented with a concentrated real estate fund. Or an income-oriented portfolio can benefit from the addition of a structured credit fund, which adds the potential for extra income and capital appreciation. Aligning strategies with investors’ objectives helps investors achieve those objectives while letting them know that you are thoughtful and deliberate about how you approach fund selection.

Offers low correlation to other asset classes

Many niche funds may offer a low correlation to other, more widely held asset classes. What is the point of buying a fund just like other funds in an investor’s portfolio? That is why selecting funds in contrarian or over-looked (yet timely) asset classes may make a significant contribution to portfolio diversification, downside risk and competitive returns.

Demonstrates due diligence

Using niche funds in investors’ portfolios may also demonstrate thoughtful due diligence. When advisors offer education up-front about the advantages of specific strategies and the reasons behind selecting a fund to execute that strategy, investors can more easily understand the benefits. These conversations can help cement the client-advisor relationship, hopefully paving the way for a long-term relationship and potential referrals.  

Can execute across client portfolios

While it is important to design portfolios uniquely suited to individual clients, it is also important to have the ability to execute a similar strategy across a client base. Using a distinct mutual fund, or group of funds, may help in this endeavor.

THE LIBERTY STREET DIFFERENCE

The Liberty Street family of mutual funds offers a broad variety of distinctive strategies. The funds advised by Liberty Street Advisors are characterized by the independence, long-term track records, and stable owner-operators of the sub-advisors for each fund.

Managers with a long-term track record executing a core strategy that is not widely duplicated elsewhere are not easy to find. That is because most managers revert back to the mean after some years of out-performance, while others just happen to be in the right place at the right time. That is why Liberty focuses on long term track records, because it distinguishes true value-add versus just being in the right place at the right time.

There is no doubt that in an investment universe that is increasingly tending towards a one-size-fits-all indexing approach, boutique funds can help advisors and investors differentiate. By adding niche funds with differentiated strategies to client portfolios, financial advisors can stand out from a crowded field.

ABOUT LIBERTY STREET

The Liberty Street Funds offer investors and financial advisors mutual funds sub-advised by independent boutique managers who possess expertise in their asset class. Because Liberty Street focuses on boutique managers, financial advisors can provide value-added strategies in actively managed and less-correlated portfolios to their clients. Through its selective multi-manager family of funds, Liberty Street provides access to timely investment strategies. The Liberty Street Funds are based in New York City, NY and advised by Liberty Street Advisors, Inc.

ABOUT TIMOTHY REICK

Timothy Reick is the Chief Executive Officer and a founding member of the HRC Financial Group of companies, which includes Liberty Street Advisors, Inc., HRC Fund Associates, LLC, and HRC Portfolio Solutions, LLC. Throughout Timothy’s, 25+ years in the industry and 12+ years since founding Liberty Street, he has had an exclusive focus of representing or working with boutique managers. His keen perspective not only on existing allocations but also on identifying emerging investment strategies has resulted in the creation of multiple successful funds at Liberty Street.

For financial professionals who would like more information about how the Liberty Street family of funds may assist in building timely, value-added and differentiated portfolios for your clients, please contact HRC Fund Associates, LLC (member FINRA and SIPC) at libertystreetfunds@hrcfinancialgroup.com or 212 240-9726.