Introducing Conversational Alpha®: Talking Goals & Returns with Your Clients

Nov 27, 2019

Conversational Alpha is officially official, complete with its own ®. I came up with the term years ago because I wanted a new way to talk about portfolio construction. Building a capable portfolio, one where asset allocation and diversification reflect an investor’s risk tolerance and time horizon, takes work. But the work isn’t all technical. There’s more of an art to it than many investors realize. Conversational Alpha became a storytelling vehicle for me, designed to put the quantitative and the qualitative factors affecting return potential in the proper context for clients. Let’s break it down.

What is Conversational Alpha?

I use Conversational Alpha as a way to convey a deeper, more memorable discussion around portfolio construction that an investor can—and wants to—hear. In that sense, Conversational Alpha represents both a journey and a destination.

By definition, Alpha is the excess return of an investment relative to the return of a benchmark. It is a clinical term and, based on experience, difficult for investors to achieve. Alpha, as a term, doesn’t necessarily resonate, or capture an investor’s attention.

But if you add in a complementary conversational element, such as a macro or micro market theme, a more relatable investment story emerges. Essentially, Conversational Alpha is a starting point for a performance-related discussion where we size up the factors that could contribute to an investment adding or subtracting from returns. The bulk of that discussion focuses on the how and why of an investment portfolio’s inner workings.

Why Conversational Alpha matters to portfolio management

One of the biggest obstacles investors face in their search for alpha is the information glut in the market. In this 24-hour news cycle, it can be a struggle to keep up with current events and to determine which developments could actually turn alpha positive or negative.

Never has the market signal-to-noise ratio been so low. But that creates an opportunity. The right conversation—one that helps cut through the noise and provides actionable thought leadership—can be a differentiator. In fact, it may be one of the key value drivers of a successful client relationship today.

Conversational Alpha in the context of portfolio management is relevant when, for example, talking about the potential advantage of sector investing and determining sub sector allocations. It can be a thread that helps investors see why combining components of certain sectors, for example Biotech and Materials, or Consumer Staples and Internet of Things, may make sense. The clinical reason is that sector and sub-industry diversification may reduce risk.  The Conversational Alpha discussion, however can focus on the different drivers and characteristics of these segments.

The second reason, beyond signal to noise, is that a story-based approach may help investors stick with their long-term investment goals. It is a way of addressing one of the biggest behavioral issues in portfolio management, which can truly have a positive impact on long term returns.

Conversational Alpha with Thematic Growth and Income Strategies

Conversational Alpha is a tool to explain the narratives underpinning long-term market trends and the factors set to disrupt the status quo.

The concept is a natural fit for Thematic Growth and Income Strategies. Compelling and relatable stories pique an investor’s interest with insights about how self-driving cars could affect their daily life, or how steady income is a necessary element of a happy retirement.

While a relatable narrative can compel investors to stay with allocations designed to achieve longer-term goals, what they ultimately want is return generation. In that vein, our next piece will delve more into the alpha component of Conversational Alpha, focusing on how to best achieve the aim of beating a benchmark.

Category: Commentary

Topics: Macroeconomic

Index returns are for illustrative purposes only and do not represent actual fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or guarantee against a loss. This information is not intended to be individual or personalized investment or tax advice and should not be used for trading purposes. Please consult a financial advisor or tax professional for more information regarding your investment and/or tax situation.

Information provided by Global X Management Company, LLC (Global X) and SEI Investments Distribution Co. (SIDCO). Global X and SIDCO are not affiliated.