It is potentially the most powerful page in any presentation book. It can articulate a firm’s identity in distinctive, memorable terms. It inspires calm fortitude during market upheavals, and it often provides points of intellectual alignment with clients and consultants. This issue of Excess Returns takes a fresh look at one of the most undervalued, misunderstood elements in the investment marketing tool kit: the investment philosophy statement.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

Investment Beliefs and Marketing

Beyond Short-Termism

Investment Beliefs, The Book

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

Investment Beliefs and Marketing

The investment philosophy statement defines the beliefs that guide investment decisions. It is the first and possibly the most important of “the four Ps” that we’ve all been taught are critical in any institutional-quality presentation: philosophy, process, people and performance. Yet many investment firms still either do not seem to have a philosophy statement or offer up as a “philosophy” a list of truisms lacking in character, substance or distinction. In 2007 I wrote an article, Philosophy for Investment Managers, about the role of the philosophy statement — what it is and is not — for the Art & Science section of our firm’s website. Since that time, much has changed.

The Evolving Role of the Philosophy Statement

I see three new trends that investment company professionals should consider when articulating their beliefs about investing:

Despite these new developments, much has remained the same. Investment managers still tend to give their beliefs short shrift, stating the obvious (an active equity manager who believes the market is inefficient) while failing to note potentially strong sources of differentiation. When belief statements are robust, they tend to be too long or larded with the uninspiring, often confusing language of academia. Actions, strategies and investment styles still are put forward as beliefs (“We are a value investment manager” is not a belief). Proof linking beliefs to results remains rare. And client review meetings, while long on portfolio characteristics and performance, rarely tie this information back to the belief system clients bought when they hired the manager. All of which adds up to a rich field of marketing opportunity for investment firms that can clearly articulate a differentiated investment philosophy and tie their beliefs back to performance.

Beyond Short-Termism

CalPERS has stated the belief that “a long investment horizon is a responsibility and an advantage.” And in their 2014 Harvard Business Review article, “Focusing Capital on the Long Term,” Dominic Barton and Mark Wiseman propose emphasis on “metrics like 10-year economic value added, R&D efficiency, patent pipelines, multiyear return on capital investments and energy intensity of production … in assessing a company’s performance over the long haul.” Many of my public equity clients, however, who believe their performance should be evaluated over at least a three- to five-year time horizon, have told me that in reality three years is a luxury. A 2013 McKinsey Quarterly survey of 1,000 board members and C-suite executives indicates that while a majority believed that a longer time horizon would positively affect corporate performance, they nonetheless felt pressured to demonstrate strong financial results in two years or less.

Mr. Barton, the global managing director of McKinsey & Company, and Mr. Wiseman, the president and CEO of the Canada Pension Plan Investment Board (CPPIB), note that “one reason why private equity firms buy publicly traded companies and take them private” is to avoid short-term performance pressure. In “Focusing Capital on the Long Term,” they write: “Research, including an analysis by CPPIB, indicates that over the long term (and after adjustment for leverage and other factors), investing in private equity rather than comparable public securities yields annual aggregate returns that are 1.5% to 2.0% higher, even after substantial fees and carried interest are paid to private equity firms.”

Proposed remedies abound for what Mr. Barton has called “the tyranny of short-termism”: superior voting rights for longer-term holders, compensation plans for company executives tied to long-term performance with penalties for underperformance and boards structured to diminish cronyism, to mention only a few.

Messrs. Barton and Wiseman zero in on the source of the problem and the solution: asset owners need to start acting like owners. At present, they write, “many asset owners will tell you they have a long-term perspective. Yet rarely does this philosophy permeate all the way down to individual investment decisions.” In other words, institutional investors need to start putting their beliefs into action. Or, put more bluntly, it’s time to walk the talk, especially when fiduciary responsibilities of the world’s largest asset owners stretch over generations.

Investment Beliefs, The Book

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

— Warren Buffett

“I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers.”

— Burton Malkiel

“We’re passive, but we’re not stupid.”

— Dimensional Fund Advisors’ co-founder David Booth

In 2011, Kees Koedijk and Alfred Slager wrote the book Investment Beliefs: A Positive Approach to Institutional Investing, which I believe will become required reading in our industry. Mr. Koedijk is Professor of Financial Management and Dean of the Tilburg School of Economics and Management, The Netherlands, and Mr. Slager, the former Chief Investment Officer at Stork Pension Fund, is director of CentER Applied Research, Tilburg University. The authors point to beliefs as key to achieving clarity of purpose in a world where volatility is the norm. In such a world, a clear set of investment beliefs — a lighthouse in a stormy sea, to borrow the book’s cover image — becomes critical.

One can read this book page by page or jump around in search of specific information. There are useful summaries and case studies spanning organizations from different countries and industries. I particularly liked the chapters that demonstrate the dispersion of beliefs around topics such as inefficiencies, risk premiums, investment horizon and sustainability. Each of these chapters includes a case study, the theory behind different beliefs and debates to be aware of; the quotes above in the chapter on inefficiencies, for example, dramatize the range of beliefs around active versus passive investing.

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.

It is potentially the most powerful page in any presentation book. It can articulate a firm’s identity in distinctive, memorable terms. It inspires calm fortitude during market upheavals, and it often provides points of intellectual alignment with clients and consultants. This issue of Excess Returns takes a fresh look at one of the most undervalued, misunderstood elements in the investment marketing tool kit: the investment philosophy statement.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

Investment Beliefs and Marketing

Beyond Short-Termism

Investment Beliefs, The Book

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

Investment Beliefs and Marketing

The investment philosophy statement defines the beliefs that guide investment decisions. It is the first and possibly the most important of “the four Ps” that we’ve all been taught are critical in any institutional-quality presentation: philosophy, process, people and performance. Yet many investment firms still either do not seem to have a philosophy statement or offer up as a “philosophy” a list of truisms lacking in character, substance or distinction. In 2007 I wrote an article, Philosophy for Investment Managers, about the role of the philosophy statement — what it is and is not — for the Art & Science section of our firm’s website. Since that time, much has changed.

The Evolving Role of the Philosophy Statement

I see three new trends that investment company professionals should consider when articulating their beliefs about investing:

Despite these new developments, much has remained the same. Investment managers still tend to give their beliefs short shrift, stating the obvious (an active equity manager who believes the market is inefficient) while failing to note potentially strong sources of differentiation. When belief statements are robust, they tend to be too long or larded with the uninspiring, often confusing language of academia. Actions, strategies and investment styles still are put forward as beliefs (“We are a value investment manager” is not a belief). Proof linking beliefs to results remains rare. And client review meetings, while long on portfolio characteristics and performance, rarely tie this information back to the belief system clients bought when they hired the manager. All of which adds up to a rich field of marketing opportunity for investment firms that can clearly articulate a differentiated investment philosophy and tie their beliefs back to performance.

Beyond Short-Termism

CalPERS has stated the belief that “a long investment horizon is a responsibility and an advantage.” And in their 2014 Harvard Business Review article, “Focusing Capital on the Long Term,” Dominic Barton and Mark Wiseman propose emphasis on “metrics like 10-year economic value added, R&D efficiency, patent pipelines, multiyear return on capital investments and energy intensity of production … in assessing a company’s performance over the long haul.” Many of my public equity clients, however, who believe their performance should be evaluated over at least a three- to five-year time horizon, have told me that in reality three years is a luxury. A 2013 McKinsey Quarterly survey of 1,000 board members and C-suite executives indicates that while a majority believed that a longer time horizon would positively affect corporate performance, they nonetheless felt pressured to demonstrate strong financial results in two years or less.

Mr. Barton, the global managing director of McKinsey & Company, and Mr. Wiseman, the president and CEO of the Canada Pension Plan Investment Board (CPPIB), note that “one reason why private equity firms buy publicly traded companies and take them private” is to avoid short-term performance pressure. In “Focusing Capital on the Long Term,” they write: “Research, including an analysis by CPPIB, indicates that over the long term (and after adjustment for leverage and other factors), investing in private equity rather than comparable public securities yields annual aggregate returns that are 1.5% to 2.0% higher, even after substantial fees and carried interest are paid to private equity firms.”

Proposed remedies abound for what Mr. Barton has called “the tyranny of short-termism”: superior voting rights for longer-term holders, compensation plans for company executives tied to long-term performance with penalties for underperformance and boards structured to diminish cronyism, to mention only a few.

Messrs. Barton and Wiseman zero in on the source of the problem and the solution: asset owners need to start acting like owners. At present, they write, “many asset owners will tell you they have a long-term perspective. Yet rarely does this philosophy permeate all the way down to individual investment decisions.” In other words, institutional investors need to start putting their beliefs into action. Or, put more bluntly, it’s time to walk the talk, especially when fiduciary responsibilities of the world’s largest asset owners stretch over generations.

Investment Beliefs, The Book

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

— Warren Buffett

“I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers.”

— Burton Malkiel

“We’re passive, but we’re not stupid.”

— Dimensional Fund Advisors’ co-founder David Booth

In 2011, Kees Koedijk and Alfred Slager wrote the book Investment Beliefs: A Positive Approach to Institutional Investing, which I believe will become required reading in our industry. Mr. Koedijk is Professor of Financial Management and Dean of the Tilburg School of Economics and Management, The Netherlands, and Mr. Slager, the former Chief Investment Officer at Stork Pension Fund, is director of CentER Applied Research, Tilburg University. The authors point to beliefs as key to achieving clarity of purpose in a world where volatility is the norm. In such a world, a clear set of investment beliefs — a lighthouse in a stormy sea, to borrow the book’s cover image — becomes critical.

One can read this book page by page or jump around in search of specific information. There are useful summaries and case studies spanning organizations from different countries and industries. I particularly liked the chapters that demonstrate the dispersion of beliefs around topics such as inefficiencies, risk premiums, investment horizon and sustainability. Each of these chapters includes a case study, the theory behind different beliefs and debates to be aware of; the quotes above in the chapter on inefficiencies, for example, dramatize the range of beliefs around active versus passive investing.

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.

It’s the most important ingredient in any winning presentation. The secret sauce. Only it’s not so secret because everyone knows what it is; they just don’t always know how to create it consistently. I am talking, of course, about conviction — the heartfelt belief that your investment company offers the best approach and the keen desire to share that belief with your audience. This month, Excess Returns considers the importance of conviction: how to get it, how to keep it and how to communicate it consistently.

With best wishes,

Liz Hecht
Founder, Principal and Director of Research

Print a PDF of this newsletter

In This Issue

Conviction = Credibility

Spy The Lie

“That’s A Good Question”

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

Conviction = Credibility

Long, long ago and far, far away, our company was hired for an odd assignment: presentation coaching on delivery only — not content. We were told that this particular investment team had worked hard on its story and messaging and now just needed to fine-tune the delivery. I understood the need to maintain consistency, but I still felt compelled to ask, “Are you sure you don’t want us to address content as well, perhaps only where we see the need for refinement around the edges?” No, said our contact, the investment team was completely comfortable with the content.

It turned out that, while senior management was comfortable with the content, the investment team was less than 100% on board. We acceded to this company’s bizarre request because I thought it would be interesting, and it was. During the coaching session, one person said “That’s a good question!” in response to every question. Another delivered a disquisition on the shortcomings of performance attribution in response to a relatively simple inquiry about the track record. And yet a third person responded to even layup questions with a peculiar wincing motion, as if about to be struck.

What was going on here? For any number of reasons, this team lacked conviction.

Sources of Conviction

Conviction can’t be faked. You either have it or you don’t. Even when you do have strong conviction, however, there are many things you and your firm can do to communicate it more effectively and to foster conviction in others on the team who do not live the investment process day to day.

Strong content. Delivery is content. If your content is weak, then you cannot deliver the investment story with conviction. There are several reasons why content might be weak. Content that started strong may have been killed by committee. Or content may have been created in a vacuum of ignorance about competitors with virtually identical content. In the latter instance, presenters know on some level that they sound exactly like their competitors, which does not exactly contribute to high-conviction delivery.

Ownership. Even strong content can fail, devolving back to bland uniformity, if the whole team does not get behind it. Our firm has developed processes to ensure that everyone charged with presenting an investment strategy feels a sense of ownership regarding the story and the presentation materials. Without such buy-in, presenters may appear to lack conviction or, worse, wander off the reservation altogether, telling a story inconsistent with the larger messages a firm wishes to convey. (We work with many investment companies that sometimes send product specialists and salespeople to a finals instead of portfolio managers; it is particularly critical that these professionals demonstrate conviction, especially when competing with teams from smaller companies that do include the portfolio manager.)

Preparation. Strong content also fails to create conviction if presenters are not well prepared. Experienced presenters all know that invincible feeling one gets when one has truly prepared well. Prepared individually and as a team. Prepared for the main body of the presentation as well as the Q&A. Prepared with the book and without the book. If you’ve been telling the same story for a long time, you are by definition well prepared. But you still need to come to the story fresh so as not to sound rote and formulaic.

Understanding the audience. The best way to prevent formulaic delivery is to understand your audience. What do they want, as a group and as individuals? How can your organization help them achieve their goals? How can you make this meeting the best possible use of their time?

Physical energy and freedom from distractions. Even the strongest conviction may fail you if you feel tired or distracted. It therefore is a good idea to avoid activities that will exhaust you the day of or prior to an important meeting. You also should make every effort to stay focused. Do you really need to schedule four meetings on the same day? Couldn’t that phone call wait until after the finals?

Whenever anyone offers us a “delivery-only” mandate now, we encourage the client to rethink this approach. There is an unhealthy “do-what-you’re-told” aspect to delivery-only that will never support genuine team conviction. Developing team ownership of a presentation is a demanding, dynamic, often time-consuming process — but the payback in finals-winning conviction is well worth the effort.

Spy The Lie In “What Deception Looks Like” and “What Deception Sounds Like,” two chapters of the 2012 book Spy The Lie, the authors, former CIA officers, explore visual and verbal behaviors that indicate deception. What struck me about this book was the number and type of deception indicators that we also see as signs of weakness during an investment presentation. People who must tell a credible story (product specialists, sales professionals, CIOs and CEOs) should read this book, as should investment research professionals required to assess the credibility of company managements.

Ex-CIA agents have a lot to teach the investment world about detecting deception. In Spy The Lie, there also are many valuable lessons for presenters who need to tell a high-conviction story consistently.

“That’s A Good Question”

For many years I have counseled our clients to stop prefacing their response to questions with “That’s a good question.” People who respond this way often do so almost as a nervous tick. Your competitors also very likely may answer most questions in precisely this manner. An even better reason to avoid this ubiquitous response, however, is that it may be perceived as evasive. Spy The Lie singles out “That’s a good question” as one of several “non-answer statements” designed to “buy time to figure out how to respond.” If the occasional “that’s a good question” slips out, it’s not a major problem, as long as the question is indeed a blazingly good question. On the whole, however, it is best to avoid this response. Show your respect for the question instead through the quality of your answer.

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.