Monthly insights for investment marketing and sales professionals
June 2011
“What is your competitive advantage?” This often is the toughest question that investment companies must answer in their quest to build assets under management – even if the question is not posed explicitly. Yet many investment managers do not provide an answer or, worse, answer in a way that makes them appear naïve. This issue of Excess Returns explores the challenge of competitive differentiation.
With best wishes,
Liz Hecht
Founder, Principal and Director of Research
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.
One of my clients told me this story and I will never forget it. “We were competing in a final for a significant piece of business,” he said. “We had prepared carefully and we were well into the presentation. We had covered the philosophy and process and I thought things were going well when one crusty old guy in the front row took off his glasses, leaned forward, looked directly at me and asked, ‘That’s all well and good. But tell us, please, what makes your firm any different from the other firms that are here today competing for our business?'”
My client said he was taken aback and fumbled a bit because he thought he already had answered that question. Based on this client’s experience, I wrote an article several years ago about strategies for competitive differentiation. The discipline of investment marketing has come a long way since then, but differentiation still remains a major challenge for many firms.
Sources of Uniformity
There are several reasons why differentiation remains a sizable hurdle for investment managers:
Investment professionals often do not grasp the difference between what is required to win versus what is required merely to compete. Attributes such as “opportunistic,” “benchmark-agnostic,” “bottom-up” and “fundamental research-driven” are not reasons why your company should win the business. They are merely why your firm qualified to compete. And yet, incredibly, even in a business as competitive as asset management, some professionals simply do not understand this distinction. If you define your firm’s competitive advantages with a string of adjectives that echo those of your competitors, then you get the T-shirt and you get to go home. But this is not an amateur sports competition. There is real money on the line here and enumerating the reasons why you qualified to compete is not a winning strategy.
Investment managers all sell the same thing: performance. Yet investment returns are so fickle that investment companies are forced by law to wear the warning label “Past performance is no guarantee of future results.” Investment professionals often mistakenly use the word “unique” (as in “one of a kind”) to describe what they do, but they all operate in a sophisticated world where, if there is anything truly unique, it is quickly arbitraged away. How then can an investment firm claim any form of enduring competitive advantage? The answer usually is, “It’s all in the execution” and execution, for all its merits, is a much tougher sell for investment managers than it is for, say, athletes. With a stunning net shot or slam dunk, one can see brilliant execution in action. Not so with inspired portfolio construction or a judicious sell decision.
Important marketing decisions are frequently made by committee. The originality required for true competitive differentiation starts with individuals who believe in the investment philosophy and process. As marketing decisions are removed from those individuals – by size, bureaucracy or organizational structures that segregate the marketing and investment teams – competitive differentiation suffers. This is particularly true in larger companies where too much valuable time is spent on describing the identity of the parent company as opposed to the investment strategy under consideration by a prospective client. (Sure the identity of the parent is important, but it should not take up the first five minutes of a 20-minute final competition for a small-cap value mandate.)
Written communications fail to capture the subtleties and nuances of in-person delivery. I recently asked one of our new clients to send her presentation book, as a first step in learning about her strategy. The book checked all the required boxes (philosophy, process, people, performance and so forth) yet failed utterly to convey even one-tenth of the intellectual ingenuity driving this particular strategy. The energy, conviction and clarity with which the portfolio manager told her story in person were completely absent from the story told on paper. Hearing her present and reading her presentation book, I never would have put the two together.
There is no objective foundation for claims of competitive differentiation. Most investment managers will tell you that their primary competitive advantage is the quality of their research: how broad, deep and insightful it is. In the vast majority of cases, however, when one asks if the manager has conducted research on its own competitive advantages, the answer is “no” or “not lately.” According to an ongoing survey on our website, 19 out of 129 — or approximately 15% — of respondents (as of this writing) checked “yes” when asked if they conducted systematic client satisfaction surveys and win/loss analyses. So how do companies know that their claims about competitive advantages are grounded in reality? Either they don’t or they possess a purely anecdotal sense of how they are different. (For more on market research, see the April issue of Excess Returns.)
I asked my client who fumbled the “what makes you different” question what the outcome was. The hiring entity decided to pass on all contenders. Maybe this organization felt like the insurance company board member I once interviewed for a client. After an extensive search, his company decided to keep managing their investments internally. “We didn’t come away from the meeting,” he told me, “with a clear sense of how we were going to be better off after hiring them than we were before.”
Who Doesn’t?
•
Who doesn’t take a long-term investment approach (i.e., investing over a three- to five-year time horizon)?
•
Who doesn’t avoid fads and trends?
•
Who doesn’t avoid market timing?
•
Who doesn’t practice intensive bottom-up fundamental research?
•
Who doesn’t hit singles and doubles, not home runs?
I have yet to meet an investment professional who claims to have a short-term, market timing-oriented approach and claims to swing for the fences based on purely top-down calls. A good rule of thumb in defining competitive advantages is to ask the question, Who doesn’t? As in who doesn’t make this exact same claim? Research may well be one of your firm’s strengths, but it’s not a competitive advantage if it fails to pass the Who doesn’t? test.
Beyond the
Beauty Parade
Investment management professionals sometimes refer to the final presentation as a “beauty parade.” This implies that the process is all form and no substance. On the contrary, the purpose of a final is to better understand how the investment strategy works and, perhaps most important, find out what the investment team would be like to work with. An article in Engaged Investor magazine, a UK publication for pension trustees, notes that trustees for the Civil Aviation Authority pension fund are “always on their guard against style over substance during presentations … the key challenge is to prevent trustees being over impressed by polished, professional presentations which might disguise a range of shortcomings.”
Alpha Partners LLC Marketing for Excess Returns®
1062 Oakridge Road South | Park City, UT | 84098
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.
Monthly insights for investment marketing and sales professionals
June 2011
“What is your competitive advantage?” This often is the toughest question that investment companies must answer in their quest to build assets under management – even if the question is not posed explicitly. Yet many investment managers do not provide an answer or, worse, answer in a way that makes them appear naïve. This issue of Excess Returns explores the challenge of competitive differentiation.
With best wishes,
Liz Hecht
Founder, Principal and Director of Research
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.
One of my clients told me this story and I will never forget it. “We were competing in a final for a significant piece of business,” he said. “We had prepared carefully and we were well into the presentation. We had covered the philosophy and process and I thought things were going well when one crusty old guy in the front row took off his glasses, leaned forward, looked directly at me and asked, ‘That’s all well and good. But tell us, please, what makes your firm any different from the other firms that are here today competing for our business?'”
My client said he was taken aback and fumbled a bit because he thought he already had answered that question. Based on this client’s experience, I wrote an article several years ago about strategies for competitive differentiation. The discipline of investment marketing has come a long way since then, but differentiation still remains a major challenge for many firms.
Sources of Uniformity
There are several reasons why differentiation remains a sizable hurdle for investment managers:
Investment professionals often do not grasp the difference between what is required to win versus what is required merely to compete. Attributes such as “opportunistic,” “benchmark-agnostic,” “bottom-up” and “fundamental research-driven” are not reasons why your company should win the business. They are merely why your firm qualified to compete. And yet, incredibly, even in a business as competitive as asset management, some professionals simply do not understand this distinction. If you define your firm’s competitive advantages with a string of adjectives that echo those of your competitors, then you get the T-shirt and you get to go home. But this is not an amateur sports competition. There is real money on the line here and enumerating the reasons why you qualified to compete is not a winning strategy.
Investment managers all sell the same thing: performance. Yet investment returns are so fickle that investment companies are forced by law to wear the warning label “Past performance is no guarantee of future results.” Investment professionals often mistakenly use the word “unique” (as in “one of a kind”) to describe what they do, but they all operate in a sophisticated world where, if there is anything truly unique, it is quickly arbitraged away. How then can an investment firm claim any form of enduring competitive advantage? The answer usually is, “It’s all in the execution” and execution, for all its merits, is a much tougher sell for investment managers than it is for, say, athletes. With a stunning net shot or slam dunk, one can see brilliant execution in action. Not so with inspired portfolio construction or a judicious sell decision.
Important marketing decisions are frequently made by committee. The originality required for true competitive differentiation starts with individuals who believe in the investment philosophy and process. As marketing decisions are removed from those individuals – by size, bureaucracy or organizational structures that segregate the marketing and investment teams – competitive differentiation suffers. This is particularly true in larger companies where too much valuable time is spent on describing the identity of the parent company as opposed to the investment strategy under consideration by a prospective client. (Sure the identity of the parent is important, but it should not take up the first five minutes of a 20-minute final competition for a small-cap value mandate.)
Written communications fail to capture the subtleties and nuances of in-person delivery. I recently asked one of our new clients to send her presentation book, as a first step in learning about her strategy. The book checked all the required boxes (philosophy, process, people, performance and so forth) yet failed utterly to convey even one-tenth of the intellectual ingenuity driving this particular strategy. The energy, conviction and clarity with which the portfolio manager told her story in person were completely absent from the story told on paper. Hearing her present and reading her presentation book, I never would have put the two together.
There is no objective foundation for claims of competitive differentiation. Most investment managers will tell you that their primary competitive advantage is the quality of their research: how broad, deep and insightful it is. In the vast majority of cases, however, when one asks if the manager has conducted research on its own competitive advantages, the answer is “no” or “not lately.” According to an ongoing survey on our website, 19 out of 129 — or approximately 15% — of respondents (as of this writing) checked “yes” when asked if they conducted systematic client satisfaction surveys and win/loss analyses. So how do companies know that their claims about competitive advantages are grounded in reality? Either they don’t or they possess a purely anecdotal sense of how they are different. (For more on market research, see the April issue of Excess Returns.)
I asked my client who fumbled the “what makes you different” question what the outcome was. The hiring entity decided to pass on all contenders. Maybe this organization felt like the insurance company board member I once interviewed for a client. After an extensive search, his company decided to keep managing their investments internally. “We didn’t come away from the meeting,” he told me, “with a clear sense of how we were going to be better off after hiring them than we were before.”
Who Doesn’t?
•
Who doesn’t take a long-term investment approach (i.e., investing over a three- to five-year time horizon)?
•
Who doesn’t avoid fads and trends?
•
Who doesn’t avoid market timing?
•
Who doesn’t practice intensive bottom-up fundamental research?
•
Who doesn’t hit singles and doubles, not home runs?
I have yet to meet an investment professional who claims to have a short-term, market timing-oriented approach and claims to swing for the fences based on purely top-down calls. A good rule of thumb in defining competitive advantages is to ask the question, Who doesn’t? As in who doesn’t make this exact same claim? Research may well be one of your firm’s strengths, but it’s not a competitive advantage if it fails to pass the Who doesn’t? test.
Beyond the
Beauty Parade
Investment management professionals sometimes refer to the final presentation as a “beauty parade.” This implies that the process is all form and no substance. On the contrary, the purpose of a final is to better understand how the investment strategy works and, perhaps most important, find out what the investment team would be like to work with. An article in Engaged Investor magazine, a UK publication for pension trustees, notes that trustees for the Civil Aviation Authority pension fund are “always on their guard against style over substance during presentations … the key challenge is to prevent trustees being over impressed by polished, professional presentations which might disguise a range of shortcomings.”
Alpha Partners LLC Marketing for Excess Returns®
1062 Oakridge Road South | Park City, UT | 84098
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.
Monthly insights for investment marketing and sales professionals
June 2014
Whether one practices “thematic investing” or merely considers themes a potential avenue to new investment ideas, one thing is certain: investors like themes. This issue of Excess Returns explores the power of investment themes from a marketing standpoint.
With best wishes,
Liz Hecht
Founder, Principal and Director of Research
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.
I am a philosophical soul. So every time something weird happens to me, I look for a larger meaning.
A few years back I attended a meeting with a well-known chief investment officer for a large global firm. The goal of the meeting was to discuss examples of the investment process, the better to understand how a potential investment becomes a portfolio holding. The CIO’s examples failed to connect to the investment process stated in the presentation book (a common problem). I sought to get the discussion back on track by starting from the beginning. “What are some of the macroeconomic themes currently expressed in your portfolio?” I asked.
My question offended him. “I won’t tolerate your trying to pigeonhole me,” he responded. The firm’s marketing representative tried to help by observing that specific portfolio investments could not be neatly tied to macroeconomic themes. All of this left me feeling as if I had committed some form of giant gaffe.
“But,” I soldiered on, “the investment process in your presentation book explicitly starts with ‘Step 1: Define Macroeconomic Themes?'” (I also gently suggested that if he was uncomfortable identifying specific themes, perhaps he should revise Step 1 so as not to mention themes.)
“Now there you go again,” he said, “trying to pigeonhole me.”
This level of opposition to the concept of themes and the sheer weirdness of this exchange convinced me that more was afoot here than met the eye.
The Marketing Power of Investment Themes
Talking about the portfolio in terms of themes helps prospective investors understand the investment world from a big picture perspective, viewing the universe of potential investments in terms of how the world is changing for better or worse and how human enterprise is responding to such changes. By “themes” I mean long-term trends such as “Aging Baby Boomers,” “The Battle Against Climate Change” or “Efficiency and Automation.”
I am far more comfortable thinking of my own portfolio in terms of themes than in terms of factor, country and sector exposures. I want to know what those exposures are, sure, but they do not speak to my imagination. Accordingly, I think of a holding in GoPro as expressing a “Weekend Warriors” theme and a holding in Costco as representing “The Rise of the Frugal Consumer.”
Purely from a marketing standpoint, there are several reasons why themes have broad appeal with both individual and institutional investors:
Themes provide context. Investors don’t only want to know about general investment principles or this or that investment. They want a clear, rich, differentiated picture of how their investment manager views the world. Themes satisfy this basic human craving for context.
Themes are active and forward looking. According to “Thematic Investing: Variations on a Theme” by Martin Steward of Investment & Pensions Europe (IPE), theme-oriented investment firms such as Newton Investment Management argue that themes by definition focus on change, making a thematic approach “more robust than traditional economic forecasting or quantitative modeling, which are both so vulnerable to the fact that history cannot be used to predict the future.” In an article by its Thinking Ahead Group, Towers Watson notes that theme-based investing “stands in clear contrast to the more widely used approach of market capitalization investing, where it is implicitly assumed that past winners will continue to win, and therefore deserve more attention and weight in the portfolio.” In a recent Asset TV video, Tim Hodgson of Towers Watson observes that all investors are thematic, but some choose to be so “explicitly and deliberately” while others are thematic “implicitly and accidentally.” (I think of the many firms that were significantly more exposed to the subprime debacle than they thought because the categories of investment they used masked such exposure in a way that a thematic approach might have uncovered.)
Themes tell a story. The investment markets, notes IPE’s Mr. Steward, ultimately may be less about countries, regions, sectors and market caps than “the overarching narratives that hold all the pieces in place.” Thematic investors build their portfolios to reflect these overarching narratives.
Themes are different. Part of the reason I originally wanted to work in investments was that I saw investing as a discipline requiring broad-based knowledge of how the world works and how the world is changing. In my role today as an investment marketing specialist, I have come to pounce on any information about top-down perspective like a starving dog thrown a scrap of food. I have learned to expect nothing but “bottom up, bottom up, bottom up” and my ears are always alert to anything different. Themes, like some of the world’s greatest investors, are top down (which does not by definition mean a lack of focus on bottom-up decision factors such as balance sheets and business models).
There are many more reasons why investment themes make sense. Why then did this CIO react so negatively to a straightforward question about macroeconomic themes? I still don’t know, really. I do know that so-called “thematic investing” is active, differentiating and forward looking in a way that purely bottom-up approaches cannot emulate. Themes represent a keyhole — a view on how and why the world of investments is changing — not a pigeonhole.
Thematic Investing
In conducting Internet research for this issue, I came up empty when searching for “investment themes” but hit the mother lode with a search for “thematic investing.” For example, I found several investment firms that believe in thematic investing and organize their research efforts around the concept of themes.
While it has many proponents and practitioners, however, thematic investing is controversial for several reasons. Its results are difficult to measure. It is easier to attribute performance to index-defined measures such as factors, countries and sectors. Many professional investors also conflate “themes” with “trends” or “fads.” As one skeptical hedge fund blogger put it, “Themes are all about fads.” And of course some of the best investments will not necessarily fit any one theme. It strikes me, however, that regardless of whether one chooses to be a thematic investor or a classic bottom-up investor, themes are merely another useful tool in the tool kit. The way some write about thematic investing, it reminds me of conventional medical practitioners who completely disavow holistic approaches and vice versa. Why not use all available resources? Some of those who have written about thematic investing also seem to get hung up on whether to start with themes and move to specific investments or vice versa — when obviously the best place to start is wherever one has the good fortune to get a good idea.
The main thing cutting across such theoretical considerations is the simple fact that investors like themes. According to IPE, Russell Investment’s OpenWorld single-manager platform gives investors access to themes such as climate change, infrastructure or individual emerging markets because Russell could not respond to investor demand for such exposures “with the standard large-cap equity and aggregate bond multi-manager products.”
Investing from the Top Down
In Investing from the Top Down, Anthony Crescenzi argues that a macro approach is best suited to the global nature of today’s capital markets. Selected chapters explore the role of exchange traded funds in implementing diversified thematic views and specific economic indicators key to understanding global market themes. Mr. Crescenzi’s book provides much-needed context to investors regardless of whether their primary orientation is top down or bottom up. By demystifying the process of reading major economic indicators, the book provides useful macroeconomic guideposts suitable for individual and institutional investors.
Monthly insights for investment marketing and sales professionals
June 2011
“What is your competitive advantage?” This often is the toughest question that investment companies must answer in their quest to build assets under management – even if the question is not posed explicitly. Yet many investment managers do not provide an answer or, worse, answer in a way that makes them appear naïve. This issue of Excess Returns explores the challenge of competitive differentiation.
With best wishes,
Liz Hecht
Founder, Principal and Director of Research
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.
One of my clients told me this story and I will never forget it. “We were competing in a final for a significant piece of business,” he said. “We had prepared carefully and we were well into the presentation. We had covered the philosophy and process and I thought things were going well when one crusty old guy in the front row took off his glasses, leaned forward, looked directly at me and asked, ‘That’s all well and good. But tell us, please, what makes your firm any different from the other firms that are here today competing for our business?'”
My client said he was taken aback and fumbled a bit because he thought he already had answered that question. Based on this client’s experience, I wrote an article several years ago about strategies for competitive differentiation. The discipline of investment marketing has come a long way since then, but differentiation still remains a major challenge for many firms.
Sources of Uniformity
There are several reasons why differentiation remains a sizable hurdle for investment managers:
Investment professionals often do not grasp the difference between what is required to win versus what is required merely to compete. Attributes such as “opportunistic,” “benchmark-agnostic,” “bottom-up” and “fundamental research-driven” are not reasons why your company should win the business. They are merely why your firm qualified to compete. And yet, incredibly, even in a business as competitive as asset management, some professionals simply do not understand this distinction. If you define your firm’s competitive advantages with a string of adjectives that echo those of your competitors, then you get the T-shirt and you get to go home. But this is not an amateur sports competition. There is real money on the line here and enumerating the reasons why you qualified to compete is not a winning strategy.
Investment managers all sell the same thing: performance. Yet investment returns are so fickle that investment companies are forced by law to wear the warning label “Past performance is no guarantee of future results.” Investment professionals often mistakenly use the word “unique” (as in “one of a kind”) to describe what they do, but they all operate in a sophisticated world where, if there is anything truly unique, it is quickly arbitraged away. How then can an investment firm claim any form of enduring competitive advantage? The answer usually is, “It’s all in the execution” and execution, for all its merits, is a much tougher sell for investment managers than it is for, say, athletes. With a stunning net shot or slam dunk, one can see brilliant execution in action. Not so with inspired portfolio construction or a judicious sell decision.
Important marketing decisions are frequently made by committee. The originality required for true competitive differentiation starts with individuals who believe in the investment philosophy and process. As marketing decisions are removed from those individuals – by size, bureaucracy or organizational structures that segregate the marketing and investment teams – competitive differentiation suffers. This is particularly true in larger companies where too much valuable time is spent on describing the identity of the parent company as opposed to the investment strategy under consideration by a prospective client. (Sure the identity of the parent is important, but it should not take up the first five minutes of a 20-minute final competition for a small-cap value mandate.)
Written communications fail to capture the subtleties and nuances of in-person delivery. I recently asked one of our new clients to send her presentation book, as a first step in learning about her strategy. The book checked all the required boxes (philosophy, process, people, performance and so forth) yet failed utterly to convey even one-tenth of the intellectual ingenuity driving this particular strategy. The energy, conviction and clarity with which the portfolio manager told her story in person were completely absent from the story told on paper. Hearing her present and reading her presentation book, I never would have put the two together.
There is no objective foundation for claims of competitive differentiation. Most investment managers will tell you that their primary competitive advantage is the quality of their research: how broad, deep and insightful it is. In the vast majority of cases, however, when one asks if the manager has conducted research on its own competitive advantages, the answer is “no” or “not lately.” According to an ongoing survey on our website, 19 out of 129 — or approximately 15% — of respondents (as of this writing) checked “yes” when asked if they conducted systematic client satisfaction surveys and win/loss analyses. So how do companies know that their claims about competitive advantages are grounded in reality? Either they don’t or they possess a purely anecdotal sense of how they are different. (For more on market research, see the April issue of Excess Returns.)
I asked my client who fumbled the “what makes you different” question what the outcome was. The hiring entity decided to pass on all contenders. Maybe this organization felt like the insurance company board member I once interviewed for a client. After an extensive search, his company decided to keep managing their investments internally. “We didn’t come away from the meeting,” he told me, “with a clear sense of how we were going to be better off after hiring them than we were before.”
Who Doesn’t?
•
Who doesn’t take a long-term investment approach (i.e., investing over a three- to five-year time horizon)?
•
Who doesn’t avoid fads and trends?
•
Who doesn’t avoid market timing?
•
Who doesn’t practice intensive bottom-up fundamental research?
•
Who doesn’t hit singles and doubles, not home runs?
I have yet to meet an investment professional who claims to have a short-term, market timing-oriented approach and claims to swing for the fences based on purely top-down calls. A good rule of thumb in defining competitive advantages is to ask the question, Who doesn’t? As in who doesn’t make this exact same claim? Research may well be one of your firm’s strengths, but it’s not a competitive advantage if it fails to pass the Who doesn’t? test.
Beyond the
Beauty Parade
Investment management professionals sometimes refer to the final presentation as a “beauty parade.” This implies that the process is all form and no substance. On the contrary, the purpose of a final is to better understand how the investment strategy works and, perhaps most important, find out what the investment team would be like to work with. An article in Engaged Investor magazine, a UK publication for pension trustees, notes that trustees for the Civil Aviation Authority pension fund are “always on their guard against style over substance during presentations … the key challenge is to prevent trustees being over impressed by polished, professional presentations which might disguise a range of shortcomings.”
Investment professionals often do not grasp the difference between what is required to win versus what is required merely to compete. Attributes such as “opportunistic,” “benchmark-agnostic,” “bottom-up” and “fundamental research-driven” are not reasons why your company should win the business. They are merely why your firm qualified to compete. And yet, incredibly, even in a business as competitive as asset management, some professionals simply do not understand this distinction. If you define your firm’s competitive advantages with a string of adjectives that echo those of your competitors, then you get the T-shirt and you get to go home. But this is not an amateur sports competition. There is real money on the line here and enumerating the reasons why you qualified to compete is not a winning strategy.
