Monthly insights for investment marketing and sales professionals
February 2013
The incorrect address, the misplaced form, the embarrassing typo, the neglected piece of critical information … all the tiny shortcomings that day after day, mistake after mistake, make our lives more difficult and cost us money. This issue of Excess Returns considers the impact of carelessness: what causes it, how it may be affecting investment companies and what can be done to prevent it.
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.
My family’s recent decision to change banks, money managers and telephone systems has plunged us headlong into a whole new world: the world of carelessness. I already knew, only too well, that this world existed. But the vast, impenetrable extent of it was new to me.
We decided to change banks, money managers and phone systems in the first place because of carelessness (as in one mistake after another) combined with a growing sense that no one, well, cared. Changing service providers, however, required that we fill out numerous forms and become acquainted with hitherto unimagined levels of exactly what we sought to avoid: carelessness. When I explained to a potential new phone system salesperson that almost every piece of information on the contract she had provided, including the phone number, was incorrect, she said, “That’s strange.” I thought to myself, “No, it’s not strange at all. It’s a routine part of the cost of doing business in today’s world.”
What does all this have to do with investment marketing and sales? Plenty. Carelessness is alive and well in the investment business and its insidious presence may compromise your firm’s ability to win and keep assets under management in ways that you haven’t even considered.
Is Anyone Paying Attention?
Carelessness at investment management companies manifests itself in a number of obvious and painful ways:
Incorrect information. A War Story on our company’s website describes how several firms lost business purely because they neglected to include the prospective client’s full and correct name on the cover of their presentation books. (See “You Can Judge a Book by Its Cover” in the Alpha Partners’ War Story archive.)
Bad grammar and misspelled words. Think of all those teachers on the boards of teachers’ retirement systems. Will they want to pay your fees if your marketing materials contain grammatical errors, typos and all manner of inconsistent usage? The average teacher almost certainly understands the difference between a compliment and a complement. Yet some investment company professionals, in my experience, do not. What is a teacher to think when being asked to pay millions in fees annually to a company that misspells commonplace words? Or to a company that indulges in total schizophrenia regarding how to spell its products? (I have seen companies spell the name of their leading product three different ways — Small Cap, SmallCap and Small-Cap — in the same document. As in, “We can’t decide how to spell what we’re selling, so we’re going to spell it however we like.”)
A July 2011 BBC News article comments on the rise in online sales after spelling errors were corrected on a consumer website selling tights. If consumers are sensitive to spelling errors when buying a pair of tights, just imagine how sensitive they are when buying asset management.
The absence of (or failure to adhere to) a well-defined process. The investment process is one of the critically important four Ps (philosophy, process, people and performance) required for success in institutional (and, increasingly, retail) investment marketing. Yet where is the process when it comes to ensuring that critical marketing documents are not filled with typos? Where is the checklist defining systematic procedures — i.e., who does what when to ensure quality? The style guide defining consistent usage? The intranet FAQ providing consistent answers to routinely asked questions about the investment strategy? The will to pay attention to these things when they do, by some miracle, actually exist?
And speaking of process, what does a humdrum mistake such as a spelling error say about a firm’s ability to follow its investment process? If a company cannot spell the name of its flagship product consistently, what does that say about its ability to conduct effective due diligence on potential investments?
Of course it’s all about process. The major cause of carelessness is not laziness, stupidity, overwork or the escalating complexity of daily life, although all of these factors come into play to varying degrees. The primary culprit is the aforementioned lack of process. Process alone, however, is not enough. People have to believe in the process and implement it consistently. And yet there is still a certain class of person in business who believes that fussing over details is somehow demeaning. These people see themselves as fighting the great strategic fight at the forefront of leadership and change. This mindset unfortunately has little to do with what ultimately really matters: execution.
The Checklist Manifesto
A checklist, when you think about it, is process in its purest, most practical form. In The Checklist Manifesto: How to Get Things Right, surgeon Atul Gawande considers the importance of using a checklist effectively in endeavors ranging from surgery to flying a plane to money management. In a chapter entitled “The Hero in the Age of Checklists,” Gawande explores how checklists benefit professional investment managers. He describes how one money manager created a checklist based on studying past mistakes (his own and those of other prominent investors). Each mistake is paired with an action item on the checklist. For example, the failure to consider the potential impact of the dot-com bust on a furniture rental company leads to the checklist item: Confirm if revenues might be overstated or understated due to boom or bust conditions.
Dr. Gawande further describes a study of 51 venture capital investors by Geoff Smart, a PhD psychologist who was at Claremont Graduate University at the time of the study and is a co-author of the best-selling business book, Who: The A Method for Hiring. Mr. Smart’s 1998 study profiled different research strategies pursued by venture capitalists. His findings showed that the most effective approach was methodical and checklist-driven. He calls the group of venture capitalists who follow this approach “the Airline Captains” and their results validate the effectiveness of this methodical style of investing: a median 80% return on the investments studied versus 35% or less for those pursuing different research strategies.
But (and here is the truly interesting part) even when checklists have proven to be wildly successful, one practitioner tells Gawande, people are reluctant to use them. “I got pushback from everyone,” says this money manager. “It took my guys months to finally see the value.” “To this day,” writes Gawande, “[this successful money manager’s] partners still don’t all go along with his approach and don’t use the checklist in their decisions when he’s not involved.”
Perhaps this is because people see checklists as being unnecessarily time consuming? Paradoxically, however, notes Gawande, investors who use checklists find the process to be “more thorough but faster.” Without the checklist, says one money manager who was able to research hundreds of bargains swiftly in late 2008, he “could not have gotten through a fraction of the analytic work or have had the confidence to rely on it.”
“Checklists,” says Mariko Gordon, Founder, CEO and CIO of Daruma Capital Management, “make sure that all the windows and doors of our investment process are locked, and that we haven’t forgotten to put the alarm on, so to speak.” In the December 2012 issue of her company’s newsletter, Ms. Gordon, a longtime fan of Dr. Gawande, describes checklists as one of several approaches to building the conviction required to manage concentrated portfolios.
The Checklist Manifesto makes it clear that, when it comes to saving lives (surgeons) or making money (portfolio managers), those who create and use a well-thought-out checklist are more likely to succeed. And yet the idea of checklists, I fear, is unlikely to gain many converts in the investment world — not because following a checklist is too difficult but because it may be perceived as too simplistic. Indeed, as Dr. Gawande laments toward the end of the book:
“We don’t like checklists. They can be painstaking. They’re not much fun. But I don’t think the issue here is mere laziness. There’s something deeper, more visceral going on when people walk away not only from saving lives but from making money. It somehow feels beneath us to use a checklist, an embarrassment. It runs counter to deeply held beliefs about how the truly great among us — those we aspire to be — handle situations of high stakes and complexity. The truly great are daring. They improvise. They do not have protocols and checklists … Maybe our idea of heroism needs updating.”
This is at once genius (Gawande’s laser-sharp perception of the problem) and very troubling (the notion that people are unlikely to act as effectively as they might because doing so conflicts with some swashbuckling idea of themselves).
The Great Typo Hunt: Two Friends Changing the World, One Correction at a Time was written for those of us who feel a tiny stab of despair every time we see a typo. Jeff Deck and Benjamin D. Herson travel the US armed with markers, chalk and correction fluid pursuing a singular mission: to identify and correct typos wherever they find them. In shop windows, fliers, marquees and chalkboards, they find commas gone missing, errant apostrophes, all the usual misspelling suspects and just plain bad grammar. The two friends offer commentary not only on correct usage but also on the large misunderstandings that can result from small typos.
When asked by his girlfriend why typos need eradicating, Jeff Deck writes:
“’It’s the creeping menace of carelessness!’ I said, not even understanding the question. To me, the iniquity inherent in typos was as plain as a swath cut through virgin forest, or dog feces upon a white beach. It was like asking why armed robbery was a problem.”
Amen.
If you enjoyed this newsletter, you also might like to (re)visit the April 2012 issue of Excess Returns, which considers the joys of being systematic.
Monthly insights for investment marketing and sales professionals
January 2013
The two most powerful words in any presentation are “for example.” Yet investment managers use specific examples infrequently or without skill. This issue of Excess Returns considers why investment company professionals so often get this wrong and what can be done about it.
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.
When I began working on Wall Street in 1981, I spent a lot of time during interviews with portfolio managers and securities analysts thinking, “I wonder what they really mean?” The lexicon of the financial world was new to me and I thought that was the problem. Yet here it is 32 years later, after I have built a career in this business, and I still frequently wonder what investment professionals really mean.
Over the course of my career, I have listened to thousands of presentations by different investment companies and, with stellar exceptions, these presentations often are completely devoid of supporting examples and explanatory detail. During new business presentations, simulating a finals for a multimillion dollar mandate, I sometimes feel like the dog in the famous Far Side cartoon: all I hear is “Blah blah blah Liz blah blah blah Liz blah blah.”
Beyond Blah Blah Blah
The blah blah factor stems from the fact that most investment managers are selling exactly the same thing (enhanced returns with reduced risk) using exactly the same language (fundamental research blah blah secular trends blah blah tail risk blah). So they all sound alike. To cut through all this sameness, I have learned over the years to ask a simple question: Can you please give me an example?
When I ask this question, one of two things happens: (1) investment firm professionals answer the question enthusiastically and I start to understand what they mean or (2) they skirt or botch the question, and I realize that they don’t really know what they’re talking about or don’t really do what they say. Put another way, this question causes professionals in our world either to rise to the occasion or fall apart.
In the July 2011 issue of this newsletter, I wrote about what we at Alpha Partners call “elephant questions,” or questions that are so big and important that they should be answered before they are asked. In my view, requests for examples are elephant questions. Investment marketers should provide specific examples before they have to be asked. Yet there are many reasons why this still does not happen:
Living in a bubble world. Few investment professionals operate outside of their own rarefied environment. They actually think that most people understand terms such as “secular trends” and “tail risk.” Compounding the problem, those out there in the real world who do not know what these terms mean are unlikely to admit it. Like the dog in the Far Side cartoon, they listen attentively without understanding.
Portfolio manager inaccessibility. The portfolio manager or portfolio specialist does not routinely make fresh, relevant examples available to marketing and client service professionals. At many firms (still, in 2013!), much lip service is given to the importance of transparency but a true culture of transparency has yet to take hold.
Fear of being pinned down. Portfolio managers live in a changing world where what makes sense one day might very well seem foolish the next. Some managers react to the vicissitudes of the investment markets by refusing to be pinned down on the specifics regarding anything at all. They are much more comfortable being vague and so a nebulous quality begins to infect all aspects of their communications. (I find it incredible, for example, that some portfolio managers still say that they plan to meet their performance objectives over a full market cycle. Whatever, the average layperson must wonder, might that mean?)
Fear of oversimplification. Sometimes investment professionals are concerned that specific examples will oversimplify their investment process. This is true in particular of firms with quantitative investment strategies. This concern may be well-founded. An even more legitimate concern, however, is that a simplified example may be the only way to make a quantitative strategy understandable and prospective clients are unlikely to buy something that they do not understand.
A low bar for salespeople. Often, when I suggest to clients that specific examples would help build understanding of the investment strategy, they say, in effect, “Liz, we are concerned that our salespeople might give the wrong examples or might give examples that create misperceptions about our investment process.” This is a legitimate concern at some companies where the salespeople, for any number of reasons, really don’t fully understand what they are selling. Such reasons range from portfolio manager inaccessibility (noted earlier in this article), firm cultures that have not yet embraced transparency and the mistaken belief that salespeople are intellectual lightweights unable to discuss the investment strategy in any depth.
The risk of faulty execution. There are indeed many pitfalls in presenting examples effectively. The wrong examples (a holding notoriously unfriendly to unions presented to a Taft-Hartley plan) can be worse than no examples at all. An example or examples presented with excessive detail can kill a presentation. Examples that contradict the investment process also are a common problem. (Such examples may prompt the question “That’s a nice story you just told me. But what does it have to do with the investment process you described earlier?”)
When Long-Term Capital Management (LTCM) began marketing to investors, writes Roger Lowenstein in his fascinating book When Genius Failed, “Long-Term even refused to give examples of trades, so potential investors had little idea of what the partners were proposing.” By not providing effective examples, investment firms rob prospective clients of that critical moment of understanding where they can say, “Aha! I see! Now I know what you mean!” After the fall of LTCM and Bernard Madoff, investors may be more likely to demand specific examples before writing a check.
But Is It Legal?
Whenever Alpha Partners recommends the use of examples, the first objection we typically hear is, “But our compliance department has told us that using specific examples is illegal.” Compliance experts Marvin Barge of Barge Consulting and Otto Medrano of Forensico Partners explain, however, that it is legal to use specific examples in investment marketing literature as long as certain conditions are met.
According to a No-Action Letter (Franklin Management, Inc., December 10, 1998), written examples can be used in investment marketing literature only to describe how the investment process is implemented — not the results of process implementation with respect to a specific security. A more recent No-Action Letter (The TCW Group, November 7, 2008), Mr. Barge explains, specifies that investment managers can present examples showing results, “but only if they show an equal number of holdings that contributed most positively and most negatively to the performance of a representative account.” Based on recent No-Action Letters, says Mr. Medrano, “compliance professionals have better guidance and thus can probably find a way to include examples in their presentations that are consistent with the law.”
At Alpha Partners, we recommend that our clients use examples in written marketing materials only to show how the investment process works; we believe that portfolio performance over time — as opposed to any one example or even a balanced suite of examples — is the best indicator of results. When presenting specific examples, however, investment management professionals should be aware of the results so as to be able to answer any questions that arise.
It is important to note, too, that the No-Action Letters referenced above pertain to Rule 206(4)-1(a)(2) of the Investment Advisers Act of 1940. These No-Action Letters apply within the United States and to companies outside of the US seeking to attract US investors. Firms not domiciled in the US, not registered under the Advisers Act of 1940 and not seeking US investors should follow the rules of their governing body.
The Missing Component
An important assignment recently sent me to the private equity section at Amazon where I found The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything. As I write this I am halfway through the book and enjoying it immensely. As the infographic on Amazon points out, this book dramatizes how pervasive private equity has become, playing an investment role in many of the products that populate our daily lives. It is this precise component that I find to be missing from many investment marketing efforts: an understanding of the underlying investments in the form of real companies, products and personalities. Investors, it seems to me, want to know that they are investing in something more tangible than a list of top 10 holdings or a pie chart showing sector allocations. They want to know what the companies in the portfolio make or do and how they fill a void or realize a dream.
Jason Kelly’s 2012 book dramatizes the role of private equity in the products that populate our daily lives.
A checklist, when you think about it, is process in its purest, most practical form. In 
