Art & Science Archive
Examples of the investment process in action can be risky in a new business presentation. Everyone knows of a situation where a key decision-maker reacts negatively to an example, causing a smooth-running presentation to sputter and run out of gas. Examples also carry the larger risk of botched execution — examples that are just too long or too boring. NOT using examples, however, is far more risky. Not using examples leaves an investment firm vulnerable to the risk of failing to connect with the audience.
Examples can clarify a complex quantitative process for an influential decision-maker who isn’t precisely sure what “algorithm” means. Examples can bring to life what is truly different about a fundamental research process that, on its face, sounds pretty much like every other fundamental research process.
Sure, examples are risky. But so is life and so is investing. Living well and investing successfully are all about taking calculated risks. And there is always an element of calculated risk in crafting a winning presentation. In this spirit, Alpha Partners believes that successful examples, like successful investments, should reflect more skill than luck. If you want to deliver examples with skill, here are a few simple rules to live by:
Play offense. The more sophisticated the consultant or plan sponsor, the more likely they are to ask for an example — the better to gauge if the underlying reality fits the process description. So why not anticipate the obvious question, “Can you give me an example?” by weaving a compelling example into the body of the presentation itself.
Be sure that the example actually fits the investment process. A common mistake is to discuss a purely anecdotal example that has nothing to do with the process just described. Or, worse, an example that actually contradicts the process — as when “a high-quality management team” is emphasized as a key investment criterion and an example then focuses on a company with legendarily mediocre management. There always will be exceptions to the rule in implementing any investment process. But when you choose to spotlight an exception, you risk sending the message that everything is an exception — i.e., that there is no true process discipline.
Be brief. To be sure the audience understands how the example fits the process, some presenters describe the example in exhaustive detail. The audience, who may be engaged at first, eventually tunes out. This problem is exacerbated when the presenter lockstep marches the audience through every detail on every page of a presentation book. The best examples are concise, and delivered in an engaging, extemporaneous manner. One of the biggest risks of presenting with an example, in fact, is that the example will dominate the presentation. There needs to be a fine, carefully considered balance between the general (the investment process) and the specific (examples of the process in action). The example should never be long. In fact, in very short final presentations (a 10-minute final, say), the example is best held in reserve for the Q&A.
Avoid the obvious. A friend tells us that he sat through three presentations for an active investment mandate: When asked to provide an example of the investment process in action, all three finalists chose to discuss the very same example, which happened to be a prominent contributor to the return of the index at that time! Instead of making this mistake, choose an example that will demonstrate your firm’s ability to think independently.
Show a little humility. In addition to a classic positive example (time permitting), provide an example of an investment that did NOT work out. Describe why it didn’t work, what your firm learned from the experience and how the investment process has been strengthened as a result. One consultant said to us recently, “I’ve been recommending for years that investment firms add an example of something that didn’t work to their presentation. So far, I have yet to see one firm take me up on that suggestion.”
Consider the audience. Examples are a great way to customize the presentation to the audience. When presenting to a public plan audience in, say, Virginia, you might consider selecting a Richmond-based company as an example. When presenting to a Taft-Hartley audience, by contrast, a sure way to go down in flames is to highlight a portfolio company known for practices that are unpopular with labor.
Remember the sell discipline. You have just carefully explained why you made a certain investment. Great. Now be prepared to answer the question, “Why might you sell this investment?” Or, better yet, anticipate the question by answering it in the body of the presentation. Of course the reasons why you would sell might change in the future. But you risk appearing reactive if you cannot or will not address potential reasons for sale. One of the biggest consultant gripes we routinely hear is that portfolio managers describe in detail the reasons why they buy yet remain strangely mute on why they sell. (Another article on this site, getting safely down, documents the typical reasons behind an investment manager’s reluctance to discuss the sell discipline.)
Ensure regulatory compliance. Regulatory agencies establish legal guidelines on how investment firms can use specific examples in written marketing materials. According to a No Action Letter (Franklin Management Inc., December 10, 1998) on Rule 206 (4)-1 (a) (2) of the Investment Advisers Act of 1940, specific examples are allowed in written marketing materials if they do not reference performance or profits and losses on a particular security and meet certain other criteria. In other words, written examples can be used only to describe how the investment process is implemented — not the results of process implementation with respect to a specific security. Investment firms using written examples also must maintain supporting documentation to be made available to regulatory agencies upon request. If a firm includes a “round trip” (i.e., buy through sell) example in its written marketing literature, then that firm must be prepared to provide detailed documentation on every holding sold during the prior one-year period. To ensure that your written marketing materials comply with legal guidelines, we recommend that you consult an expert in regulatory compliance for investment firms such as Marvin Barge of Barge Consulting (www.bargeconsulting.com).
Keep it fresh. Sometimes an investment company will use the same example of the investment process in action over and over again. The presenters delivering the example have learned to do so in a rote, follow-the-numbers manner. If you are not excited about the investment anymore, how can you expect the audience to catch fire? To avoid becoming stale, we recommend maintaining a library of fresh examples on an Intranet. A library of examples makes the process come alive — not only for outsiders but for marketing and client service professionals who are not directly engaged in the investment process. Most important, a library of fresh examples serves as a critical reality check, a way of constantly answering the following vital questions, “Does real-life process implementation actually fit the story being told to consultants, new business prospects and existing clients? Do we as a company really do what we say we do?”