Insulation Against Poor Performance

Excess Returns

Monthly insights for investment marketing and sales professionals


	October 2011


	How can investment companies insulate their businesses from experiencing the same ups and downs as their portfolios? The answer to this question is particularly important now when the markets are prone to daily bouts of schizophrenia. This issue of Excess Returns explores certain timeless sources of business stability in an industry where the product being sold, performance, changes frequently and dramatically — and often for no clearly discernible reason. With best wishes, Liz Hecht Founder, Principal and Director of Research Print a PDF of this newsletter

Volume 1 | Number 10

In This Issue

Insulation Against Poor Performance

The C-Word

Being Wrong

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
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www.alphainvestmentmarketing.com

Insulation Against Poor Performance

Back in the fall of 2000 one of our clients showed me an educational presentation by a company that I will call Famous Value. Our client, the CIO of his own firm, also was on the board of an endowment that had hired Famous Value. Famous Value, being famous for value in a hyper-growth market, had been underperforming spectacularly for some time. Our client showed me several performance bar charts in a recent presentation to his endowment, and the vertiginous decline in human wealth made me feel slightly sick, even though it wasn’t my money.

But the decline in asset values was not this CIO’s focus. His focus was on the high quality of Famous Value’s communications. Famous Value, he explained, was able to retain clients even during protracted periods of underperformance owing to the caliber and frequency of its communications. Famous Value in fact also was famous for having a large, talented, well-paid communications team — at a time when most investment firms were only just beginning to realize the importance of communications. This gentleman wanted his own company to provide communications materials equal in quality to those of Famous Value.

Five Ways to Performance-Proof Your Investment Business

While our client was on the right track in focusing on communications, his company did not have the resources to build a Famous Value-style communications department. There are, however, several commonsense ways to retain clients when performance is weak, whether your firm is large or small — and without necessarily having a large communications team:

1.	Show up and act like you want to be there, in good times and bad. I have heard several stories about investment professionals who call to ask, “Do we really have to attend this meeting in person? Can’t we just do it by phone?” The moral of these stories usually goes something like this: “As soon as there is any shortfall in performance, that company is gone. I’m never going to bat for them.”
2.	Teach your clients something new. One of our firm’s key philosophical beliefs is that people want to learn something new. If you consistently provide clients opportunities to learn — about investing, the current markets and their portfolio — they are more likely to go to bat for you when you need support. And not only because you offer educational opportunities but also because they understand at a deeper level why your firm invests the way it does and why their portfolio might inevitably underperform during certain periods.
3.	Provide context. This is part of the educational process. Your numbers may be down on an absolute basis, but they still may be pretty darn good relative to the indices and peer group managers as well as on a risk-adjusted basis. In our practice we see investment professionals who are inordinately apologetic about underperformance without providing this context (the opposite of those who don’t even want to show up for routine client review meetings).
4.	Admit your mistakes. Sometimes performance is dreadful because your investment decisions were wrong. In these cases, many clients will value your firm’s ability to identify and decisively address sources of underperformance. Correcting and communicating mistakes signals both investment process integrity and human integrity. (Discussing mistakes without alarming your clients, however, requires a certain amount of finesse. The September 2011 issue of Excess Returns considers strategies for communicating mistakes effectively and the book Being Wrong, noted in this issue, explores the art and science of learning from mistakes.)
5.	Develop multiproduct relationships. Offering more than one product is one source of stability, but the real stability comes from cultivating multiproduct relationships. If a client leaves you for poor performance in one investment strategy, that doesn’t mean you have lost the relationship — unless that client invests in only one of your firm’s strategies. This is why many investment companies seek to build stability by offering solutions to big-picture client investment challenges — as opposed to merely selling products.

The best way to performance-proof your investment business is to meld all of these positive attributes — a heartfelt desire to meet with clients, education, context, process integrity and human integrity — into relationships where your clients become genuine die-hard fans. Fans rarely switch sides, even after an extended losing streak.

For additional information on retaining relationships when performance is disappointing, please visit the following articles in the Art & Science section of our website:

Bedside Manners for Client Service Professionals

How to Stay Up When Your Numbers Are Down

The C-Word

In most walks of life outside the investment world, change is perceived as positive. Many investment managers, in fact, like to invest in change because change spells opportunity. Yet these same investment managers will go to great lengths to hide or disguise change at their own firms. Changes to the investment process are never called by their real name but instead are euphemized as “refinements” or “enhancements.” Investment managers are afraid that change will be viewed as a dangerous break in consistency. But what if consistency is proving to be consistently wrong? What if the world has become more complex and difficult, requiring change to remain successful? Well then, why not embrace the C-word? Admit that you have made a change in your investment process. Institutional investors and consultants are not naïve. They understand change and may even welcome it, particularly if you provide a compelling explanation of why change is necessary.

Being Wrong

Did you know that, even according to the lowball estimate, medical mistakes are the eighth leading cause of death in the US — worse than breast cancer, AIDS and motor vehicle accidents? Or that for commercial aviation to take the same toll in the US as medical errors do, a sold-out 747 would have to crash every three days, killing everyone on board? You would if you had just read Being Wrong: Adventures in the Margin of Error by Kathryn Schulz. The book examines lessons learned from error in every walk of life and thus is bound to be of interest to investors, who in order to be successful must systematically identify, evaluate and learn from their mistakes.

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