Making the Cut

At the recent SunStar Strategic Client Conference for Mutual Funds: Energizing Your Growth Strategy, there was a panel discussion surrounding how to be included on various platforms. Panelists included Gene Goldman, Director of Research for Cetera Financial, James Peterson, SVP & CIO for Charles Schwab Investment Advisory and Janet Yang, Senior Fund Analyst for Morningstar, Inc.

Peterson explained that in terms of Schwab Select Lists, the retail space list has more traction than the ETF list. Also, for active managers he recommends thinking about what you can bring to the table besides alpha. “Think about what else you offer, like downside protection or a creative income strategy—for instance, how does your fund address retiring baby boomers? These offer advantages over index funds,” he said. That being said, he also seeks managers with solid security selection skills and who deviate from the benchmark. When meeting with Schwab, don’t just show them your pitchbook—dazzle them with something they won’t find during their own research on you.

Goldman explained criteria his firm seeks, such as managers who are volatility drivers who have historically done well from a volatility standpoint. Cetera likes bottom up managers and likes both long and short term strategies. They like to be risk diverse and allocate 20 percent of equities to the alternative risk bucket. “We don’t just look at past performance, but are very forward-thinking. We will sometimes add a manager who has struggled in the past if we think he’ll do well in the marketscape we foresee,” Goldman said.

Yang discussed the processes in place at Morningstar. For instance, they tend to be skeptical toward alternative strategies and how they will fare in the future. She does not recommend active/tactical allocation as these strategies are hard to execute well and consistently. “When it comes to our gold, silver or bronze ratings, these are not short-term recommendations, but rather what we expect in terms of long-term performance,” she said. The star rankings, on the other hand, are quantitative and backward-looking. However, she explained that quant alone is not what they seek—Morningstar wants to cover funds that are important to investors. To this end, they screen for asset size and opt for smaller funds they think investors should know about. Morningstar has an open door policy and welcomes office visits, and loves to tout undiscovered managers.