Asset Allocation: Is Modern Portfolio Theory Dead? (2/2)

This is the second part of the summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. You can read part 1 here.

Moderator:
  • Michael Jones, Chairman and Chief Investment Officer, Riverfront Investment Group
Panelists:
  • Colin Moore, Chief Investment Officer, Columbia Management, $339 billion AUM
  • Howard Present, President and Chief Executive Officer, F-Squared Investments
  • Steve Murray, Director of Asset Allocation Strategies, Russell Investment Group

How do fees affect your product decisions taking into consideration QE3 and a persistent low rate environment? Does paying 30-50 bps for bond allocations affect your product choices?

Murray said that fees do affect their product decisions, but that they always try to identify strong managers and the fees are a tradeoff versus the additional return that they’re expected to provide. Since Russell has a manager of managers structure allows them to move between managers with different fee levels as well as incorporate other products such as ETFs and mutual funds.

Fees have a higher impact when the product they’re attached to performs like Beta, Present ob served. Over the last decade, it was very difficult to extract value from equities as an asset class, while bonds appear that they will be difficult going forward. In 2008, the average target date fund was down 28%, so it didn’t matter if a manager was slightly above or slightly below that average. Relative performance in a down market is rarely appreciated by clients. You should be more aggressive with fees on beta products versus those that are designed to generate alpha, he said.

Does your philosophy of using low cost, transparent, liquid beta in the form of ETFs make it harder for your products to coexist on a sponsor platform alongside more traditional ones? — Randy Bullard

Jones proposed that their philosophy, which combines stocks, bonds and ETFs into dynamic allocation solutions is complementary to the more traditional solutions (like Russell). there is more than one way to create value besides picking stocks from a narrow slice of an asset allocation pie chart. They added another value dimension by adjusting the amounts allocated in each slice of the market based on the prices and momentum in each asset class. It’s not an either or decision to use their products or traditional. There’s a philosophical diversification that can be complimentary instead of competitive. Continue reading

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Current Trends in the Electronic Payments Industry

The following is a short summary of the keynote speech by Jeff Yabuki, President and CEO of Fiserv, Inc.

Jeff talked about four drivers to build growth, profit and loyalty in the financial services industry:

1. “Away From” is the New Global Position

Social media has become ubiquitous and is available on every mobile device.  You never really know where someone else is when you’re communicating with them … and it doesn’t matter!  Functionality that provides mobile banking and mobile payments is slowly coming to the US, years after it became common in Asia.

For example, Starbucks has enabled customers to access their pre-paid cards from their smartphones to pay for their coffee (see Everything is easier with Starbucks Card Mobile).  “Fast and easy” is a value proposition usually works.

How would banks respond if Apple announced that iTunes users could make P2P payments to each other?  How would that disrupt the mobile payments market?  Apple has filed at least nine (9) patents for a closed-loop payment system, as covered in Apple to build mobile payments business around iTunes credits?:

A patent application filed by Apple in August 2009 and published today [April 2010] describes the use of an iPhone, or other electronic device, to make payments to other consumers or traders using the consumers’ choice of a credit or debit card, their bank account or credit stored in their iTunes account.

How would the mobile payment industry be disrupted if Apple enabled their 200 million iTunes to make P2P payments to each other?

Google Wallet is already in field trials and assuming that Google’s purchase of Motorola is not blocked, Motorola phones running Google Wallet could be on the market shortly.  See Google Wallet: First Impressions.

In a real-time Fiserv conference survey, 69% of attendees plan to make new investments in mobile technology within the next 12 months.

2. Electronic Payments Options Continue to Grow

Debit transaction are growing faster than credit and now represent 35% of all non-cash payments.  Use of prepaid cards was up 21% last year with 6 billion transactions.  Payments processing generated over $280 billion in revenue in the US.  Only 53% of the 140 billion payments are electronic.

There is approximately $50 billion in uncaptured payment interchange transactions in US.  This is a tremendous opportunity for financial institutions to capture market share.

Electronic payments are also good for the environment!  They reduces paper, increases efficiency as well as drive new revenue. (see How do electronic payments benefit the environment?)  And 58% of users of online bill payment say that the environmental impact influences their decision to pay electronically.

Consumers who use online bill payment generate more revenue for banks.  They have lower “churn” and are 3-4x more profitable than others. Fiserv bill payment and presentment solutions can facilitate banks’ ability to offer online bill payments to their customers.  Bill payment data can also be used to predict customer’s future actions.  According to a study done by Fiserv:

… bill payment data can be used to reliably predict customer behavior. Decelerating online payment activity served as an early “red flag” that the customer was likely to move his or her account to another institution in the near future, providing the financial institution with an opportunity to take preventative action.

In another real-time conference poll, 70% of attendees say that their current online payment strategies are effective or very effective.

3. Peer-to-Peer (P2P) Payments Taking Off

There are still $2.4 billion in physical checks still being written and transferred in the consumer-to-consumer segment.  P2P payments are growing rapidly.  There were $865 billion in P2P payments (11 billion transactions) in the US in 2010.  That works out to about $175 in transactions per household per year.  This is another big opportunity for financial institutions to capture new revenue.

How can banks “electronify” these physical payments?  ZashPay from Fiserv is one option.  Popmoney was an alternative, until their parent company, CashEdge, was bought by FIserv.  These two services will most likely be combined in the near future.  PayPal is the largest player in P2P payments.  However, banks see PayPal as a direct competitor and have even teamed up with each other to create an alternative to PayPal, called clearXchange.   Jeff didn’t miss the opportunity to point this out to the audience, which contained a few hundred banking customers!

AlertPay and Obopay are two startups in the P2P payment market that haven’t gained much traction.

How Great Leaders Inspire Us to Take Action

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The speaker was Simon Sinek, Renowned Leadership Expert and author of Start With Why.

“There are ‘leaders’ and ‘those who lead’,” Simon asserted.  Most companies have no clue why their customers are their customers.  They only think they know. Simon explained that there are two ways to change human behavior — through manipulation or through inspiration.

Manipulation

There are numerous ways that companies try to manipulate people to buy, Simon proposed.  The biggest one is fear, but others are price cuts, aspirational messages and peer pressure.  A company might claim that ‘70% of the industry is using our service’.  But what about the other 30%?  Maybe they know something that we don’t?

There’s a huge difference between innovation and novelty, Simon argued.  Real innovation changes the course of industries, if not society itself. Take the fax machine versus the camera phone.  The first is innovative and changed the way we communicate.  The other is just a feature added to an existing product. It’s novelty. “Novelty isn’t innovation,” Simon reminded us, emphatically.  Innovation is often less, not more, since less is more powerful than more (see Apple’s minimalist line of products).

Adding features doesn’t breed loyalty, so how do we stand out in a crowded marketplace? The alternative is inspiration.

Inspiration

Regardless of industry, great communicators think, act and communicate the exact same way, which is the complete opposite to everyone else.  They have the most loyal companies and employees.  What are they doing differently?

The Golden Circle

This looks just like a bullseye, with the words ‘why’, ‘how’ and ‘what’ inside. Innovative companies work from the inside out. They define ‘why’ they exist before anything else. All other companies do the opposite. They decide ‘what’ they will make or do and ‘how’ they will do it, but never get to the ‘why’, Simon commented.

By WHY, he means why does your organization exist? Why do you get out of bed every morning? And why should
anyone care?

Innovative companies like Apple and SouthWest Airlines have clear, consistent values and are experts at communicating them. Many visionaries aren’t leaders because they lack the ability to communicate effectively.

Apple’s employees love it there because they’re given a reason to come to work — they find an industry where the status quo has always been accepted and they destroy it.

What is a company? Simon’s definition is, “it’s a group of people with a common set of values and beliefs”. People respond to the unfamiliar by seeking out other people that share their values and beliefs. An owner of an Apple computer can instantly connect with another Apple computer owner. The computer they purchased becomes a symbol and defines who they are. Anyone else that displays the same symbol most likely shares their values and beliefs. It’s human nature to seek out symbols to feel like we belong.

The difference is between buying a product or service because you ‘like’ the company versus buying it because you ‘love’ the company.  People ‘like’ Dell, but they ‘love’ Apple.  Love is an emotion and drives behavior.  It’s irrational. Like is a feeling and is quite rational.  Getting people to love your company is the difference between repeat business and customer loyalty.