“Participant Alpha: A Strategic Approach to Superior Performance”
 

WHAT’S MORE IMPORTANT – what markets return or the return participants actually get?

As obvious as the answer may seem, the question is not rhetorical.

In fact, it points to what may be the greatest unexploited opportunity for you to add value: the opportunity to close the gap between market returns and participant returns.

Just consider the magnitude of that performance gap.  For the 20-year period ending December 31, 2005, according to the most recent study by respected research firm Dalbar, the average equity mutual fund investor earned an average annual return of 3.9% versus 11.9% for the market as represented by the S&P 500 Index.⁽¹⁾ That’s 800 basis points of foregone returns every year for 20 years.

There is a simple, straightforward way to add return by focusing on “participant alpha”  (as opposed to what Modern Portfolio Theory refers to as alpha). Adding participant alpha is simply closing the performance gap between what markets give and what investors actually get.

The key to generating positive participant alpha is behavior.

Changing investor behavior requires an investment process robust enough to overcome the powerful human emotions that time and again provoke return-reducing behavior.  Specifically, such a process has two components:

·         A strategic approach to asset allocation based on the time to an investor’s goal.  Most investors have invested too little in equities in general, and small- and mid-cap equities in particular, because of concerns about higher short-term volatility generated by these investments.  As a consequence, they do not benefit from the higher returns that equities have historically generated over time.

·         A risk-management system that methodically reduces exposure to volatility over time.  It can increase the ability of individual investors to stay invested during turbulent markets and to avoid chasing winners during positive market environments.  A system that minimizes the normal human tendency to buy high and sell low, to chase last year’s winners on the one hand, or hide in cash on the other, is itself a significant source of value.

Experience and ongoing research offer compelling evidence that this type of approach can create the potential for delivering not only significant incremental returns, but also enhance plan participation.  For example, in Seligman’s Time Horizon Matrix^® asset allocation strategy used with 401(k) plans, we see a nearly 70% usage rate by participants.

To learn more about implementing asset allocation strategies in a 401(k) plan, please contact Seligman Advisors at 888-597-1553.  

Diversification does not ensure a profit or protect against loss in a declining market.

⁽¹⁾Source: Dalbar, 2006 Quantitative Analysis of Investor Behavior. The study examined real investor return, monthly cash flows, retention rates, and trade volume. Dalbar calculations and analysis include monthly returns of the S&P 500 as provided by the © Stocks, Bonds, Bills and Inflation 2006 Yearbook^TM, Ibbotson Associates, Inc. The S&P 500 Index is an unmanaged index of 500 large-cap US companies, and is a widely-used indicator of stock market performance. Mutual fund sales, redemptions, exchanges, reinvested dividends, and assets under management were provided by the Investment

Company Institute. Investors cannot invest in an unmanaged index, such as the S&P 500. 

Past performance is no guarantee of future results. The return and principal value of an investment will fluctuate with market conditions. Returns do not represent the performance of any Seligman mutual fund, including Seligman TargetHorizon ETF Portfolios^SM, and do not reflect the effect of any management fees or trading costs. If such charges had been included, performance would have been lower.

Stock prices fluctuate and you could lose money. The stocks of smaller companies may be subject to above-average price fluctuations. Though mid-cap stocks may offer greater growth potential than large-cap stocks, they nay also be subject to greater volatility.

Seligman Time Horizon Matrix^® is an asset allocation framework developed to help investors seek their specific goals. The Matrix is designed to seek to provide investors an appropriate asset class mix for investment portfolios, based on their time frame for achieving specific goals. Furthermore, with regard to using the Seligman Group of Funds or other funds of any other manager in seeking to follow Seligman Time Horizon Matrix^®, there is no assurance that the funds selected will actually correlate to the asset classes that the investor is seeking to track, and the performance of the funds selected may differ from the performance of those asset classes.

This material is authorized for use only in case of a concurrent or prior delivery of the offering of a prospectus of a Seligman mutual fund, which includes complete information about sales charges, expenses, and risk factors.  Please read it carefully before investing or sending money.

The views and opinions expressed are provided for general information only, and do not constitute specific tax, legal, or investment advice to, or recommendations for any person. There can be no guarantee as to accuracy of make forecasts. Opinions, estimates, and forecasts may be changed without notice.

The Seligman Group of Funds is distributed by Seligman Advisors, Inc. This material is distributed by Seligman Advisors, Inc.

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