At Newfound Research, we don’t believe in the “holy grail” of investment strategies; we don’t believe the “best” investment solution is necessarily the one that performs the best.

Instead, we believe that investment products and vehicles must have clearly defined purposes and targets, and the best solutions are those that consistently meet those targets.

When we work with prospective clients, the first thing we stress is discovering the purpose of the product. We take a “investor first” stance and ensure that the product we are developing is something that will deliver value to the end investor. To do this effectively, we first must explore who the target investor is, what their risk tolerances are, what their overall investment goals might be and what other solutions they may be looking at.

Most importantly, we ask what problem the product will solve for the investor. This question defines the core purpose of the product. Example answers are: “an enhanced version of the S&P 500,” “a more efficient strategic allocation,” or “a product for yield-starved retirees.”

The core purpose of the product defines how it will fit into an already existing investment portfolio or plan. Will it be a core holding or a satellite strategy? Does it aim to take the place of an already existing strategy, or will it try to define space for itself?

After defining the core purpose, the next question to ask is what the target behavior will be for the product. In a benchmark and index driven world, this is a significant question because it often defines how investors will look at the product, how they will attempt to fit it in their portfolio, and what other strategies the product will be compared against. Often a prospective client will come in with benchmark constraints and it is our job to ask whether the benchmark is appropriate for the product.

This question is as relevant to the end investor as it is to the prospective client. To accurately identify a benchmark gives the end investor an understanding of the expected behavior of the new portfolio and allows them to rationalize how it can fit within their portfolio. A mis-identified benchmark can be as destructive for the firm in inappropriate performance comparisons as it can be for the investor in misallocated assets and risk.

At Newfound Research, we believe that a well designed product is not one that necessarily always out-performs its peers, but one that the end investor or advisor can easily understand, both from an implementation and expected behavior perspective. If a product is difficult to understand and rationalize the behavior of, it will be difficult for investors to find a place for it in their portfolios.

While we hold the end investor above all else, when we work with a firm to help develop an investment strategy, we strive to understand the culture of that firm and what they are trying to achieve. How will their clients measure performance? Over what time period should success or failure be measured? We take a step back and ask ourselves, “are the goals set out by the firm for the product even achievable?” Is the story easy to tell (which is not only important from a sales and marketing perspective, but also important for the end investor in understanding how the product will behave)? Is the product chasing an investment style that is the “flavor of the month,” or will it attract sticky assets that are interested in the product for the long term.

A well executed product is one that satisfies both the prospective client’s wants and needs as well as the end investors’ goals.