Fund companies are known to go too great lengths to try to create alpha for their clients. Some rely on high-conviction strategies - a formula Alpha Architect says it can offer at lower costs. Money Management Executive asked the company's founder, Wesley Gray, about its business model and how it competes.

What are the biggest changes you see in the asset allocation field?

Whenever you do asset allocation, simplicity matters. Never confuse complexity with adding value, which means that if you're a product talker in the crowd, it might offend a lot of people. We actually do the data and the empirical work on it. When you start toying with a lot of the different asset allocation tools that are in practice, you can make the back test look good; you can pick a timeframe where it looks good. But is it robust? Is it going to work over different perturbations of the model? Can you pull one asset out or put another asset in? A robust model should be able to work in all those conditions. It's like fact and fiction in asset allocation.

How are you marketing your business?

It's all inbound marketing. We run Advantage Blog Alpha Architect, we write research, and I write books and post papers to academic sources, and harvest that inbound marketing. We have CRM software. We have so much flow right now we can't even deal with it.

It seems you're saying that you need torethink your marketing efforts.

The reason we need to couple our really good inbound efforts with outbound efforts is we're moving into this active ETF space. We always want to maintain inbound flow and try to minimize having people go through distribution channels because that's what imposes costs on the investor. We want to create a direct channel where we can essentially eliminate the middleman cost. Our main focus is education. We put out great content. We do tons of free research. We do our best to use what they say in social media. If people like your stuff, guess what? They're going to tell their buddies. Their buddies are going to tell their buddies. That's a much more powerful way to market than having guys on the phone, saying, "Hey, you should buy this ETF, it, never goes down."

Given the changes in the fund industry- where active is being reconsidered given the low-cost options of passive - how does that effect the business opportunity for your company?

When we looked at the assessment of asset management, the research says the same thing. It's not that active management is just uniformly bad. Most people misinterpret the academic research on this. It implies active is bad at the current cost structure. What we want to bring to the marketplace is what we call affordable, active alpha.

The way we want to do it and make it affordable is to minimize costs in the distribution channel. If we can go directly to the consumer and don't need the sales guys because we have enough organic flow, and enough organic capital, it's a way for us to deliver true, high-conviction, high-performance, alpha-earning strategies that we can rip the costs out.

Do you see your service as being something where fund companies might become your customers as a bolt-on to what they're doing to try to better leverage their funds?

We don't want them to because we have a belief that we want to create something new that gets rid of the old model. I basically believe 100% in the Vanguard model. But it's my core belief ours is different than theirs. I believe active management, high-conviction strategies can work. It's not easy. You need to give people long-term, five- to 10-year hold type things. There are some anomalies, if you get the right investors, where you can actually generate true outperformance, but you need to do it cheaply for people.

Who would you be drawing business from?

We're explicitly focused on the hedge fund guys, and the mutual fund guys. They are our targets.

Which mutual fund companies? The biggest?

No, ones that do high-conviction, true active management. An example is a high-conviction, 50-stock portfolio. There's really not that many that are high conviction in the mutual funds segment.

Several providers have funds that are focused on some sectors, as well as other funds that concentrate on certain regions of the world.

Like, Janus 20. Those are the guys that we want to take from, because No. 1, we can deliver the same performance, if not better. And No. 2, we can deliver the same performance, if not better, after costs and after fees.

How do your fees vary?

On our active ETF right now, the plan is to charge 75 basis points. We've done the analysis, and all the high conviction of competitors in the mutual fund space, and the average is 120. There's a 40, 50 basis point spread that we can immediately drop to the bottom line. We don't push marketing fees for the fund. We want to deliver high-value add, but at an affordable cost.

How do you anticipate marketing going forward?

Our primary effort is through speeches and PR. Our main focus is to write good content that people want to read. Then use different technology and SEO to get it out to the marketplace.

Which different technologies?

AdWords is a traditional way. There are new technologies like Outbrain and, which facilitate getting that content out. If people read it and share it, you pay less. If people read it, and they leave without sharing, you pay more. Our main goal is to minimize distribution costs. The best way to do that is by producing good content with the people we've got inhouse and pushing it out through our existing channels .

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