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
December 2011
Marketing and sales professionals, even veterans with decades of experience, can still learn vital lessons about their own discipline through everyday life. Communicating with the checkout person at the supermarket, visiting your doctor or hiring a contractor — all such interactions, small and large, yield a wealth of insights about do’s and don’ts. Last year, a major purchase taught me a few new lessons and reaffirmed some old truths regarding how human beings make big decisions.
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.
The time is late July 2010 and I am standing in the center of a riding arena in Virginia, watching as three horses are being ridden around and around again. In a moment, it will be my turn to try each of these horses. I am on a mission to buy a new horse as a partner for my sport, three day eventing. During the course of this same week, I will try 18 horses and take careful notes about each one. It occurs to me that this process is rather like a finals competition for institutional asset managers. All of the competitors are well trained and offer a strong track record. I have studied the performance statistics for each horse, and I am confident that virtually any one of them would be an excellent partner. So which one will I choose and why? My ultimate decision, like the decision to hire an investment firm, will depend in some measure on rational thought but also in large part on emotion, sales skill and purely situational factors.
Helping Buyers Decide in Your Favor
My experience buying a horse underlines several key decision factors in any sales process: seller responsiveness, skill in managing the relationship, the enthusiasm of the seller for the product, the importance of diverse sales media and good old-fashioned timing.
1.
The Seller’s Responsiveness. A few sellers did not return my initial call for several days and, when they did so, managed to sound bored and indifferent. In his investment marketing classic, Marketing Institutional Money Management Services, author Philip Halpern defines responsiveness as the "promptness, courtesy and extensiveness with which money managers fulfill requests." The lack of responsiveness, writes Halpern, is "perhaps the most important hurdle that gets money managers into trouble" and, paradoxically, the only hurdle that is "completely and always under the control of the money manager."
2.
The Seller’s Skill in Managing the Relationship. Just as in the investment world, several of the more responsive horse professionals also had a well-defined process for getting to know me and what I wanted to accomplish. These sellers moved to the top of my list as I began to see them not merely as sellers of a product but as a resource. One trainer suggested that I sit down and create a list of what I was looking for in a partnership with a horse; she then discussed my list with me in a thoughtful, caring manner. I did not buy a horse from this trainer, but I almost did and I will recommend her enthusiastically to others in the future.
3.
Enthusiasm for the Product. Another trainer was so enthusiastic that I found myself thinking, "Gee, she really loves this horse. Maybe she should buy him herself." As it happens, I bought her horse, in part because of this woman’s infectious enthusiasm. I tried another horse who, on paper, was equivalent in experience and price. But in this case, by contrast, the seller seemed more interested in negotiating the sales price than she was in the horse.
4.
Diverse Sales Media. The strongest candidates were advertised actively via every conceivable channel: the Internet, the classifieds and word of mouth. But one trainer told me that she did not believe in creating sales videos for horses, as the videos could be taken out of context. "Wow," I thought, "that’s like a hedge fund with one of those super-secretive websites that seems to say, ‘We’re too cool to be bothered with marketing.’" (Do these still exist, I wonder, given the current premium placed on transparency?) Anyway, as you will see in a moment, a sales video ultimately proved decisive in my own final purchase decision.
5.
Good Old-Fashioned Timing. Our clients often ask me whether it’s best to present first or last in a finals. I used to say, "If you give a great presentation, it doesn’t really matter." And there can be advantages to going first. Based on my experience buying a horse, I now say "If you are given a choice, choose to present last." I tried 18 fantastic horses in one week and I bought the last two that I tried on the last day of my search.
Yes, that’s right, I bought two horses. In investment industry parlance, I "split the mandate." My first choice, based on his sweet personality and the quality of our test ride together, was Vintage Trial (aka "Little Vinnie"), described in the May 2011 issue of Excess Returns. But I could not get my second choice, Larkrullah (aka "Big Luke"), out of my head. During my test ride on Luke, when I put him into a gallop and then asked him to slow down again, he seemed simply not to notice my request. Based on this first ride, the risk (being unable to stop him) clearly outweighed the reward (his fantastic athleticism). If I had based my decision purely on this ride, I never would have seen Luke again. But I kept thinking about Luke’s sales video, which showed a keen, powerful horse in good control.
I am taking a calculated risk here, I thought, but if I can learn to ride him like that, then I will have something exceptional … So I bought both Luke and Vinnie, and the only thing I now have trouble deciding on any given day is whether to ride them both or just give them a big hug.
Going last in a finals competition is by no means always the best option. In his popular blog, marketing expert Seth Godin notes that showing up first can be an advantage — if you believe that you are in a position to set the bar higher than your competitors. In situations where the competition is tight, however, last may well translate into the most positive lasting impression.
So should you make an effort to get your time changed to last, as some marketers recommend? I say no. Show up when you are scheduled to show up and give a standout presentation. If you appear to be changing the time to harness some small situational advantage (and, trust me, the key decision-makers in your audience will be onto this), then you run the risk of simultaneously (1) annoying people and (2) conveying that you lack confidence in what really matters: your firm’s ability to generate consistent long-term investment returns.
Just in case you still believe that human beings make their best decisions based mainly on rational thought, you need to read How We Decide by Jonah Lehrer. The book documents research on the role of emotions and reason in decision-making. Mr. Lehrer explores how we decide in fields as diverse as investing, football and piloting a plane.
Monthly insights for investment marketing and sales professionals
November 2011
Why are so many presentation books for institutional asset managers so bad? These books are designed to guide, inform and serve as a tangible record of new business and client presentations representing millions in revenue. Everyone understands how important they are. Everyone works very hard on them. Why then do most books look alike, sound alike and suffer from the same obvious flaws? By understanding the many answers to this question, investment firms can move closer to an enduring solution.
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.
Recently a prospective client called our firm asking about one of our primary capabilities: presentation strategy. The prospective client tells me that her boss is interested in improving her firm’s new business presentation. Her firm recently lost a significant piece of business and consultant feedback points to the presentation as the principal reason for the loss.
So I ask, as I always do, “What do you mean by presentation? Do you mean the story itself, how you tell the story in person, the story told by the book, the way the book looks or all of the above?” “Oh, the book,” she said, “the book is fine. We have done a lot of work on our book and we are very proud of it. We do not want to make any changes to our book. We want to improve the way we tell the story.”
What she means is the way her team tells the story using the book. If the presentation is ill, we know from experience, the disease often originates in the book. In the due course of time, she sends us the book and I am dismayed to see that it is dreadful, even more so than most. It is so dense with competing information that, if there is a good story, no one, even the presenters themselves, is likely ever to find it.
This happens all the time: people tell me they have a problem with their presentation but their book is just fine. And, as with any serious disease, one must first diagnose the cause before prescribing a cure.
Root Causes of Bad Books
In a spirit of solving the problem by understanding it, let me put forward a few key reasons why these books so often fail to achieve the desired effect.
1.
The relationship between importance and complexity. The more important something is, the more complex it becomes. A lot of people, often with strong opinions and competing objectives, become involved in the creation of these books. The result of too many cooks rarely is what the original chef intended. In fact, many books begin to have a certain everything-and-the-kitchen-sink feel that is completely at odds with their desired effect. One even sees individual book pages that look like they were created by a hoarder. A single page, for instance, might try to explain its primary meaning in three different ways and in three different places: the title, the subtitle and what is sometimes known as a “strap line,” which looks like a giant footnote at the bottom of the page. And this does not even include all the bullets and sub-bullets and yes, even sub-sub-bullets. Investment firms frequently invoke the tenet “less is more.” But they rarely live the reality of this tenet when creating their presentation books.
2.
The challenge of fulfilling a dual purpose. A presentation book often is sent ahead or left behind. So investment companies feel compelled to include all those bullets, thereby forcing presenters to repeat information because there is nothing left to say that is not already on the page. As dramatized in a war story on our website, however, information overload flows from a legitimate fear that decision-makers will decide that less is not more but, well, less. In our practice we have seen hyper-minimalist books providing so little information that the presenting firm might be perceived as lacking in substance. When the book must stand alone, there is a point where too much information causes a reader to shut down. But it also still is possible to provide too little information.
3.
The philosophy-process-people-performance formula. All investment managers must present consistent with this formula. It is required and expected, and it makes a lot of sense. But in implementing this formula, investment firms frequently achieve merely formulaic results. It is a difficult art to stand out from a crowd of competitors while at the same time checking all the required boxes.
4.
The myth of the secret sauce. We often hear stories that are much more interesting than the story told by the book. When we ask about this discrepancy, people sometimes tell us that they do not want to give away “the secret sauce.” Here again, there is a happy medium between providing too much information and so little information that potential clients might suspect that you are hiding something or, perhaps worse, that you lack any real competitive edge.
5.
Fear of linearity. Many of these books include investment process maps with so much detail that it is impossible to connect the parts to one greater whole. When we try to communicate the process in a few simple, linear steps, we are told that “It isn’t that simple in real life. One step does not follow another like that. What we do doesn’t really fit what it says here.” This fear of oversimplification, while certainly valid, tends to result in unnecessary complexity. “Of course,” we tell our clients, “we know it’s not this simple; this minimalist, linear process map is merely a representation to facilitate understanding. Everyone knows that the full complexity of your investment process cannot be captured on one page. But the main thing is to be clear.” A clear visual depiction of your investment process sends the following vital message: “Our process is repeatable and therefore our performance is repeatable.”
Did I tell our new client that we thought her book was in need of an overhaul? Yes, eventually and with considerable tact supported by specific examples of potential improvement. After all, if I was her doctor and she told me she was fine when I knew she had cancer, I would be duty bound to correct her. Is this overdramatizing a bit? Yes and no. A bad book won’t kill you, but it might very well contribute to the death of your business.
The Entropy Factor
Years ago my partners and I had a fun meeting with a group of communications professionals who wanted to recreate their firm’s presentation books. Their current books were long, dull and probably very difficult for presenters to use. Once upon a time, they told us, these books had been really good, before migrating to their current unwieldy state. When asked why the regression, they said, “Oh, you know, the entropy factor.” Ahhh … we all said laughing, the entropy factor. Entropy, broadly defined, means “a process of degradation or a trend to disorder.” Here is what “entropy” means in the world of investment presentation books: doing the same thing over and over again without knowing why, thereby perpetuating a state of randomness and chaos in a document that should exemplify deliberation and order. Entropy is what happens when page after page is allowed to proliferate with no guiding authority to say, “Wait, why exactly are we adding this page?” Entropy is what happens when you ask, “Why are these pages here?” and someone answers “Because they’ve always been here.” Entropy results from the belief that everything should be included just in case, even though many of those pages are no longer germane. In sum, entropy is total lack of relevance supported by habit as opposed to best practice.
The Cost of Verbosity
The failure to streamline and simplify presentation books may have another negative impact that investment companies are only just beginning to consider. According to an October 18, 2010 article in Pensions & Investments, RFPs increasingly are asking firms about their carbon footprint (“Some RFPs Ask Firms How Green They Are”). Investment companies are becoming environmentally friendly for a number of reasons. These include genuine concern about the environment as well as concern about their reputations. P&I also notes that “institutional investors are beginning to incorporate environmental risk factors into their asset allocation processes.” In light of this trend, do you really want to be the firm that shows up to a finals with an 80-page book?
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.
Yes, that’s right, I bought two horses. In investment industry parlance, I "split the mandate." My first choice, based on his sweet personality and the quality of our test ride together, was Vintage Trial (aka "Little Vinnie"), described in the 
