Performance is key to understanding any investment product. So why is performance often treated as an afterthought in investment marketing materials — buried at the tail end of a pitch book, for example, where it is prone to neglect and misunderstanding? In this issue we consider the question, “Where does performance belong?” along with some of the myths and misinformation that have shaped performance presentation strategy.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

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In This Issue

When Last Should Come First

The Performance Guy

Hasta La Vista!

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.

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When Last Should Come First

I’m on the phone with my friend M, a sales professional, who tells me with some dismay that her boss recently decreed that performance — even top-quartile numbers — should always appear at the end of every pitch book for every product. “Come again?” I say. “Shouldn’t strong performance come first? Isn’t that what you’re selling?” Yes, she explains, but her boss believes that performance (results) must by definition follow philosophy, process and people (the strategy and resources applied to getting results). I used to agree with this view …

… Flash back to New York City about 15 years ago when I am having lunch with the Head of Sales, let’s call him Z, for a well-known investment company. I am hoping that Z might give our company some business, but Z keeps saying things like, “Let’s face it, at the end of the day all that really matters is performance.” “Yeah, right,” I groan inwardly, “until your team underperforms, which, inevitably, it will.” This was back when I, too, believed that the track record must logically come last.

Whether performance comes first or last is an important question with different answers depending on the situation. I’ve thought about this for years and worked with different companies on different approaches. Here are some key lessons that I’ve learned:

1. Sell your own track record — don’t let consultants do it for you. The received wisdom at certain investment firms is: “We don’t present performance up front because the consultant already has covered performance with the prospective client.” Or (a variation on this same theme): “Good numbers are a given; all of our competitors have good numbers, give or take a few basis points. If we didn’t have good numbers, we wouldn’t be here.” Of course consultants will already have presented your numbers to prospective clients. But you cannot wholly rely on consultants to present what really matters: the story behind the numbers.
2. Tell the story behind the numbers. This is how you not only win business but also create loyal clients who are more likely to stick with you even during those inevitable periods of underperformance. The story behind the numbers proves that your performance results mainly from skill as opposed to luck; it provides context, explaining why your numbers, while perhaps lower than those of a competitor at a given point, nonetheless are more likely to preserve capital over time. Providing context sets expectations, allowing clients to understand why you avoid certain industry sectors and therefore underperform when those sectors are in favor … or why you are likely to perform better in a down market than in an up market.
3. Keep the portfolio front and center — do not sacrifice the product on the altar of philosophy, process and people. An unfortunate by-product of putting a key portfolio attribute such as performance last seems to be that all product attributes — performance attribution, portfolio composition, portfolio characteristics — are lumped last along with performance. In practice, given short attention spans and probable time cuts, this means that many investment presentations only barely touch on or completely neglect what matters most: the portfolio and portfolio performance. As a result, in my experience, the typical final presentation proceeds rather like a waiter who describes the history of the restaurant, the professional biographies of everyone in the kitchen, the chef’s beliefs about cooking, the process for preparing the food and then finally, at long last, the specials on the menu that night.
4. Be flexible. What shocked me about my friend M’s story is her boss’s inflexible all-performance-last-all-the-time mindset. Expediting the focus on performance is particularly important when your numbers are strong. As in, “If you’ve got it, flaunt it!” But what about those inevitable periods of underperformance when your numbers require explanation? At such times it may well make sense to lead with the philosophy, process and people. In other words, create a foundation for understanding first — as opposed to starting with an out-of-context explanation for recent underperformance. The presentation strategy you follow during periods of underperformance will depend on many different variables: the extent of the underperformance, the reason for it and what’s going on with the market as well as with competing managers. As I have discussed in another article (“How to Stay Up When Your Numbers Are Down”), under one set of circumstances, you may need to take your product off the shelf for awhile; under another, you might credibly position it as the contrarian option.

At the end of the day (just kidding … when will politicians and financial executives stop saying this?), Z never gave us any business and M is now happy at another firm with a more flexible, strategic approach. And what about us? Lucky us, we increasingly have the good fortune to work with firms that are happy to put their long-term track record front and center. After all, alpha is the bull’s-eye. Why shouldn’t it come first whenever possible?

The Performance Guy

Presenting performance effectively requires understanding diverse metrics (Jensen’s alpha, anyone)? So I was delighted when one of our clients told us about Investment Performance Guy, published by performance measurement guru David Spaulding of The Spaulding Group. This blog and David’s newsletter provide a lucid, engaging look at different ways to think about the numbers. David’s January 25, 2011 blog post, for example, poses a question many people are asking right now, “How many risk measures are enough?”.

Hasta La Vista!

Even as risk measures proliferate, relatively few money managers measure one of the biggest risks to portfolio performance: ineffective selling. Based on analysis of $500 billion in professionally managed equity portfolios, Cabot Research has shown that a surprising number of managers give all of their alpha and more back by selling at the wrong time. In an article for Value Investor Insight, Mike Ervolini, Cabot’s CEO, explores the behavioral finance drivers behind ineffective selling. In a nutshell, explains Mike, “buying focuses on the potential for positive future events whereas selling very often focuses on pessimistic past events.” As a result, investment companies spend more time, creative energy and marketing copy on buying than on selling. From both an investment and a marketing standpoint, an effective sell discipline thus can become a decisive competitive advantage.

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