Shifting Financial Marketing into Gear
Peak Performance: How Funds Can Deliver The Right Results That Win Over Investors
“Winning isn’t everything, it’s the only thing.” This famous sports quote, often attributed to Vince Lombardi, (actually coined by UCLA college football coach Red Saunders), can be a bit like that for fund managers talking about performance. But for fund managers, performance is only part of winning.
When thinking about just how best to present an investment strategy there are multiple pieces that all fit together – the firm’s setup, the fund, the strategy and yes the performance. But ask anyone in the institutional, allocator, or even in the family office space and they’ll say performance is important but just a piece of a bigger picture.
And that creates somewhat of a quandary for fund managers looking to attract investors. Without a strong performance, a fund may not attract much interest. With too strong a focus on performance, allocators may be wary of the returns. So knowing your audience is key as each type of investor may have differing priorities.
Once that’s ironed out, funds must decide on how to present their performance story. This is generally straightforward, but with a few wrinkles, it can help differentiate a fund from the pack. Yes, comparing returns on a long-only S&P 500 fund to the S&P Index may be an appropriate benchmark. Including key metrics such as the Sharpe, Sortino or Omega ratios, will no doubt be part of the conversation too.
Yet, what investors want is for fund managers to illustrate is just how the strategy works and how it adds value to the investor. This differs somewhat for each investor but ultimately, fund managers need to articulate just what a strategy does and how it performs in certain market conditions. This may be included in basic marketing materials such as a pitch book. And even if it is not included, it is likely the question will be asked in person. So being ready to tell investors how a fund would perform in certain scenarios, knowing the old disclaimer about past performance, will be a key component to a fund’s marketing strategy.
How’s Your Return Looking?
Nell Sloane, a principal at Capital Trading Group and a 25-plus year veteran of the futures industry, helps match CTAs with high net worth investors. She said investors today are much more inquisitive than they were before the 2008 financial crisis. The sales cycle for investment is significantly longer and the focus on sustained but realistic returns is much more prevalent than it was before the financial crash. To her, risk adjusted returns are indeed a major consideration, but not the only one.
When talking about returns, it is helpful to explain just how well a fund performed in certain market events. This is a golden opportunity for funds to explain how they do what they do and why. There are differing opinions about whether investors really care much anymore about how a fund performed or would have done in the 2008 financial crisis. The managed futures industry likes to hang its hat on the double-digit profits hauled in during the market meltdown. Some professionals frankly are not all that interested in what happened 10 years ago. They may be more interested in how a fund performed in various mini- or flash crashes. How did a strategy perform in the August 25, 2015 Flash Crash when the Dow Jones Industrial Average plunged about 1,100 points in the first five minutes of the trading day? How did it handle the 2016 presidential election or the June 2016 Brexit vote or the Dow plummeting 1,175 points on February 5, 2018? Brief but severe market moves are not uncommon these days.
Sloane is interested in all of them actually, as each event is different and opens the conversation to determine just how much a fund manager knows about what worked and what didn’t in various market environments.
“The process of bringing on investors is best done by explaining just what it is that you do and how you do it,” she said. “They need to explain what market conditions they excel in and what conditions they struggle in.”
This is where fund managers earn the trust and confidence of investors, explaining lessons learned both positively and negatively in the wake of a market event.
“Bottom line, an investor wants to know, ‘What are you going to do to help reduce risk and what market action can negatively impact your trading?'” Sloane said. “So then, investors can formulate their own opinion as to whether it is a fit for them in their portfolio. They want to know what is the driver of those returns, the stress point in the portfolio and what conditions from an economic aspect and from a pure technical aspect affect their trading.”
The final piece about returns is to keep talking to investors, no matter what. Sloane said investors put a tremendous amount of faith in the fund manager and those that communicate best, tend to keep clients the longest. A drawdown is inevitable and a major slide in performance can happen. But the best fund managers are those who explain what and why something happened, particularly when it is bad news. Sending monthly tear sheets is almost obligatory but a monthly newsletter and regular visits with investors is better. Picking up the phone to tell your clients about a major drawdown, what happened and why – is critical.
“It’s imperative that a fund manager reach out to clients, either by webinar, email or phone when there are losses,” Sloane said. “Don’t make up excuses but define what happened, why it happened and what is expected moving forward. That will build additional credibility and confidence going forward. The lack of communication during times of losses will cause the loss of clients. They won’t stay on the path with the fund, particularly a CTA.”
Communicating all of these performance messages is part of a winning strategy – and that is everything.