"Dear Investor" letters are perhaps the most vital communication between a portfolio manager and his or her clients. The best such letters generate excitement and instill confidence. The worst are dull, complacent and filled with generalities, clichés and jargon. This month’s issue of Excess Returns explores best practices in letters to investors.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

Dear Investor

Between the Lines

College Stress Solutions

Alpha Partners is an investment marketing firm specializing in research and presentation strategy. Our goal is to create alpha (excess returns) by helping investment firms win, keep and diversify assets under management.

Alpha Partners LLC
435.615.6862

www.alphapartners.com

Dear Investor

A while back one of my clients, a portfolio manager who runs his own firm, asked me to review a quarterly letter to investors penned by a member of his staff. I agreed to help and opened the letter as soon as it landed in my in-box. The letter was sloppily written, devoid of specificity and larded with the standard, self-satisfied clichés that often characterize such communications: "we are long-term investors" … "we don’t practice market timing" … "fundamental research is our guiding light" … yadayadayada.

I honestly did not know what advice I could give to improve the letter. "Look," I said when he called me, "You know this letter is dreadful. I know this letter is dreadful. There is absolutely no point in editing it. You just need to rewrite it yourself from scratch, and then you need to write the letters to investors yourself from now on. You write well and, most important, you know the portfolio."

The advice to write it yourself, I learned later, is a best practice endorsed and lived to the letter (pun intended) by none other than the king of investor communications, Warren Buffett. As most readers of this newsletter will know, Mr. Buffett himself writes the now-legendary annual Berkshire Hathaway letters to shareholders.

What you may not know, and what I learned only recently through Investing Between The Lines, is that Mr. Buffett grades a company higher if the CEO writes his or her own shareholder letter. When asked why by Investing Between the Lines author L.J. Rittenhouse, Mr. Buffett explained: "I look for someone who talks to me frankly and honestly about the business, the way a partner would. If the CEO doesn’t write the letter, it’s a black mark against them for one reason — they may not know their business very well."

Best Practices in Letters to Investors

In addition to "write it yourself" (as the portfolio manager, CIO or CEO), the following best practices also may be helpful to you and your firm in writing effective letters to investors.

Bring the Portfolio to Life. The portfolio is not made up of sectors and statistics. It consists of companies and the people who run them. Who can ever forget Rose Blumkin, founder of the Nebraska Furniture Mart, a company that joined the Berkshire Hathaway fold in 1983? Mrs. B, we learn in Mr. Buffett’s 2013 letter to shareholders, emigrated to the United States from Russia. She never spent a day in school and she worked at the company she founded until the age of 103. Investor letters need more such information about the companies in the portfolio and the people behind them.

Provide Historical Context. In 2008, the per-share book value of Berkshire Hathaway declined 9.6% while the S&P 500 declined 37%. In the opening paragraphs of the 2008 letter to shareholders, Mr. Buffett soothes investors with the balm of historical context:

Amid this bad news … never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles — and many others — the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

Investor letters can thus instill confidence even when the world seems to be coming to an end.

Communicate a Point of View. When asked to provide the confidence-inspiring historical context and future perspective noted above, however, many portfolio managers are unable to do so. They hide behind the assertion that their investment orientation is exclusively bottom up and long term. They protest that they never address what’s going on in the larger market as this would smack of market timing. A consistent theme in Mr. Buffett’s writing is investing in stocks as if they were "small portions of businesses" and then holding them for the long term. Reading his letters, however, it strikes me that his bottom-up, long-term focus has often been misinterpreted by those who glibly disavow the importance of big-picture perspective. If I were a Berkshire Hathaway investor who met Mr. Buffett in a coffee shop and asked him what was going on in the portfolio, he would provide (just as he does in his letters) an in-depth, thoughtful description rich with detail about the companies, the industries where they operate and the larger world that supports them. He would offer, in other words, a point of view. He would not scold me for invoking the evil of market timing.

Put Performance in Perspective. When it comes to the business of investing and communications about investing, any form of excess should be avoided — excessive pride or excessive penitence. The tone of investor letters should be factual, forthright, and humble, neither overdramatizing weak numbers nor aggrandizing strong numbers. When the numbers are fantastic, remind investors when and why they are likely to be less fantastic. When the numbers are disappointing, admit mistakes and do not make excuses. The explanatory detail and modest tone of earlier letters will serve you well when your numbers are down.

Circle Back Often. In this same vein, remind your investors what you wrote in past letters and how it turned out. Were you right or wrong and why? What did you miss? As I have written in the past, one of the best ways to understand how a portfolio manager works is to understand past mistakes and how the manager learned from his or her mistakes.

There are many reasons why portfolio managers and CIOs do not write their own letters to investors. They may simply not write well enough or they may be unwilling to make the time to communicate with their investors. In his 2013 letter to shareholders, Mr. Buffett writes, "[We] like your company’s prospects. We feel fortunate to be entrusted with its management." In other words, "This is your company and we are the faithful, hard-working servants of your money." Such language has permeated his communications with investors over the years, and is likely well received precisely because it is rare. After all, Mr. Buffett operates in a world where some believe that communicating effectively with investors is not sufficiently important to merit their time.

Questions? Comments? Dissent? Click here.

Click here for other issues of Excess Returns.

You are receiving this newsletter as a member of the investment community. If you no longer wish to receive it, please respond to this email with “No More Penguins” in the subject line. To subscribe to this newsletter, send an email with your request to info@alphapartners.com. Your privacy is important to us. We will never rent, sell or share any information that you provide.

"Dear Investor" letters are perhaps the most vital communication between a portfolio manager and his or her clients. The best such letters generate excitement and instill confidence. The worst are dull, complacent and filled with generalities, clichés and jargon. This month’s issue of Excess Returns explores best practices in letters to investors.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

Dear Investor

Between the Lines

College Stress Solutions

Alpha Partners is an investment marketing firm specializing in research and presentation strategy. Our goal is to create alpha (excess returns) by helping investment firms win, keep and diversify assets under management.

Alpha Partners LLC
435.615.6862

www.alphainvestmentmarketing.com

Dear Investor

A while back one of my clients, a portfolio manager who runs his own firm, asked me to review a quarterly letter to investors penned by a member of his staff. I agreed to help and opened the letter as soon as it landed in my in-box. The letter was sloppily written, devoid of specificity and larded with the standard, self-satisfied clichés that often characterize such communications: "we are long-term investors" … "we don’t practice market timing" … "fundamental research is our guiding light" … yadayadayada.

I honestly did not know what advice I could give to improve the letter. "Look," I said when he called me, "You know this letter is dreadful. I know this letter is dreadful. There is absolutely no point in editing it. You just need to rewrite it yourself from scratch, and then you need to write the letters to investors yourself from now on. You write well and, most important, you know the portfolio."

The advice to write it yourself, I learned later, is a best practice endorsed and lived to the letter (pun intended) by none other than the king of investor communications, Warren Buffett. As most readers of this newsletter will know, Mr. Buffett himself writes the now-legendary annual Berkshire Hathaway letters to shareholders.

What you may not know, and what I learned only recently through Investing Between The Lines, is that Mr. Buffett grades a company higher if the CEO writes his or her own shareholder letter. When asked why by Investing Between the Lines author L.J. Rittenhouse, Mr. Buffett explained: "I look for someone who talks to me frankly and honestly about the business, the way a partner would. If the CEO doesn’t write the letter, it’s a black mark against them for one reason — they may not know their business very well."

Best Practices in Letters to Investors

In addition to "write it yourself" (as the portfolio manager, CIO or CEO), the following best practices also may be helpful to you and your firm in writing effective letters to investors.

Bring the Portfolio to Life. The portfolio is not made up of sectors and statistics. It consists of companies and the people who run them. Who can ever forget Rose Blumkin, founder of the Nebraska Furniture Mart, a company that joined the Berkshire Hathaway fold in 1983? Mrs. B, we learn in Mr. Buffett’s 2013 letter to shareholders, emigrated to the United States from Russia. She never spent a day in school and she worked at the company she founded until the age of 103. Investor letters need more such information about the companies in the portfolio and the people behind them.

Provide Historical Context. In 2008, the per-share book value of Berkshire Hathaway declined 9.6% while the S&P 500 declined 37%. In the opening paragraphs of the 2008 letter to shareholders, Mr. Buffett soothes investors with the balm of historical context:

Amid this bad news … never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1/2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles — and many others — the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.

Investor letters can thus instill confidence even when the world seems to be coming to an end.

Communicate a Point of View. When asked to provide the confidence-inspiring historical context and future perspective noted above, however, many portfolio managers are unable to do so. They hide behind the assertion that their investment orientation is exclusively bottom up and long term. They protest that they never address what’s going on in the larger market as this would smack of market timing. A consistent theme in Mr. Buffett’s writing is investing in stocks as if they were "small portions of businesses" and then holding them for the long term. Reading his letters, however, it strikes me that his bottom-up, long-term focus has often been misinterpreted by those who glibly disavow the importance of big-picture perspective. If I were a Berkshire Hathaway investor who met Mr. Buffett in a coffee shop and asked him what was going on in the portfolio, he would provide (just as he does in his letters) an in-depth, thoughtful description rich with detail about the companies, the industries where they operate and the larger world that supports them. He would offer, in other words, a point of view. He would not scold me for invoking the evil of market timing.

Put Performance in Perspective. When it comes to the business of investing and communications about investing, any form of excess should be avoided — excessive pride or excessive penitence. The tone of investor letters should be factual, forthright, and humble, neither overdramatizing weak numbers nor aggrandizing strong numbers. When the numbers are fantastic, remind investors when and why they are likely to be less fantastic. When the numbers are disappointing, admit mistakes and do not make excuses. The explanatory detail and modest tone of earlier letters will serve you well when your numbers are down.

Circle Back Often. In this same vein, remind your investors what you wrote in past letters and how it turned out. Were you right or wrong and why? What did you miss? As I have written in the past, one of the best ways to understand how a portfolio manager works is to understand past mistakes and how the manager learned from his or her mistakes.

There are many reasons why portfolio managers and CIOs do not write their own letters to investors. They may simply not write well enough or they may be unwilling to make the time to communicate with their investors. In his 2013 letter to shareholders, Mr. Buffett writes, "[We] like your company’s prospects. We feel fortunate to be entrusted with its management." In other words, "This is your company and we are the faithful, hard-working servants of your money." Such language has permeated his communications with investors over the years, and is likely well received precisely because it is rare. After all, Mr. Buffett operates in a world where some believe that communicating effectively with investors is not sufficiently important to merit their time.

Questions? Comments? Dissent? Click here.

Click here for other issues of Excess Returns.

You are receiving this newsletter as a member of the investment community. If you no longer wish to receive it, please respond to this email with “No More Penguins” in the subject line. To subscribe to this newsletter, send an email with your request to info@alphainvestmentmarketing.com. Your privacy is important to us. We will never rent, sell or share any information that you provide.

Inspired client service can delay terminations due to poor investment performance — possibly long enough for performance to turn around. Yet in their client presentations investment firms make the same mistakes they often make in new business presentations — with a few extra gaffes thrown in for good measure. This issue of Excess Returns looks at how investment companies can improve communications to their most important audience: existing clients.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

What Clients Want

It Matters

A Field Guide

Alpha Partners is an investment marketing firm specializing in research and presentation strategy. Our goal is to create alpha (excess returns) by helping investment firms win, keep and diversify assets under management.

Alpha Partners LLC
435.615.6862

www.alphainvestmentmarketing.com

What Clients Want

The first time I ever heard a client service presentation, I thought it was a mistake. Approximately five minutes into the presentation, I leaned forward and asked, “You know this is supposed to be a client meeting, right — not a new business presentation?” “Oh yes,” the presenters assured me, “we know …” and on they went enthusiastically telling me about their philosophy, their process and all the new additions to their team. Where, I wondered, was the discussion of investment performance, top contributors and detractors, new purchases and sales? And when might they get to the rationale for current portfolio positioning?

This presentation team did finally get to the point … just as their time was about to run out. But it was too little too late, particularly as their performance at the time was weak. The entire presentation, in fact, seemed designed to delay focus on the real issue at hand: disappointing numbers.

Subsequently I have learned that this mode of presenting to clients is not at all unusual. Just as often occurs during new business meetings, performance and the portfolio are routinely sacrificed on the altar of philosophy, process and people.

Best Practices for Client Presentations

It doesn’t have to be this way. Here are a few key best practices for conducting effective client meetings:

Cut to the chase. Open with investment performance and the portfolio. Describe what went right, what went wrong, what changes your team has made to the portfolio and why. Then you can briefly touch on the investment strategy and any important news about your organization, always allowing extra time for questions before closing with a description of how the portfolio is positioned for the future.

Resist the urge to sell yourselves all over again. In our business, one often is advised that it is necessary to “resell the relationship” by reminding clients why they hired your firm. This certainly is good advice. Based on the many client presentations I have witnessed, however, investment companies follow this advice to a fault, in effect acting as if no prior relationship exists and reeducating clients from scratch every time they meet. A logical response is, “We know all that. We hired you already, remember? But what have you done for us lately?”

Reinforce your investment strategy — in the context of the client’s portfolio. Every client meeting is an opportunity to build fresh understanding. For example: “This is a classic holding for us as we invest in companies that meet three important criteria …” Or: “This recent underperformance can primarily be attributed to our underweighting of X and Y sectors. As you may recall, we avoid X and Y because performance is dependent on interest rate fluctuations and commodity price movements.” When performance is strong, remind your clients why it might not always be strong. When performance is weak, remind them why it is likely to turn around given the nature of your strategy.

Understand when exceptions are necessary. In certain exceptional cases, it will be necessary to resell the relationship. The arrival of an important new decision-maker, for example, may necessitate a synopsis of your firm’s identity and investment strategy. Providing such a synopsis will build understanding of performance patterns that may prove critical at some point in the future.

What clients want, ultimately, is straightforward commentary about what is going on in their portfolio. You should remind them why they hired you — but always in the context of what you have done for them lately.

It Matters

In planning this month’s newsletter, I researched the topic of client service on the Internet. What struck me is the number of current articles and research papers that still pose the question, “Does client service matter — or is it really all about performance?” Long on data and short on insights, many researchers with impressive credentials seem to have spent a great deal of time and ink providing the obvious answer that yes, it matters. Oh good, so glad we got that established. Now let’s reconsider the many commonsense reasons why it matters:

Time to turn around when performance is subpar. Depending on the asset class, you may only have a few quarters to turn performance around prior to termination. Strong service generates understanding of the investment strategy, which in turn can create a climate of tolerance around performance disappointments, at least for a while — and a while may be all you need to get back on track.

The fan factor. Strong service can make the difference between clients who are card-carrying fans and thus will tolerate a few seasons of disappointment and — at the other end of the spectrum — clients who loathe your organization and will jump on any excuse to see the back of you.

Cross-sales and referrals. Fans also generate cross-sales and referrals. By contrast, clients dissatisfied with service are unlikely to refer your firm or buy another product — even when you have hot dot numbers. And how many managers outperform with such unfailing consistency that they can afford to deemphasize service? Precisely. Yet investment firms continue to commission research proving the need for compensation programs rewarding client service professionals. This represents a huge opportunity for companies that innately get it.

A Field Guide

What Clients Love: A Field Guide to Growing Your Business, by Harry Beckwith, is a classic filled with inspiration for marketers and client service professionals. I keep it on a reference shelf and refer to it as I would a dictionary — or a bible. Mr. Beckwith’s pithy approach (a typical chapter is one or two paragraphs long) makes this book a highly desirable alternative to the many tomes written on the same topic by Ivy League PhDs who, sadly, cannot write a clear sentence. In a chapter entitled “Ask Questions Like a Priest,” for example, Mr. Beckwith writes, “To get the truth, use phone interviews by independent third parties. Like the priest behind the screen, those third parties will get candid answers and you will get more accurate insights into your customers and prospects. To get the truth, get on the phone.” To which I can only say, Amen!		What Clients Love is a classic filled with wisdom for investment company marketers and client service professionals.

Questions? Comments? Dissent? Click here.

Click here for other issues of Excess Returns.

You are receiving this newsletter as a member of the investment community. If you no longer wish to receive it, please respond to this email with “No More Penguins” in the subject line. To subscribe to this newsletter, send an email with your request to info@alphainvestmentmarketing.com. Your privacy is important to us. We will never rent, sell or share any information that you provide.