While there are many understandable health warnings about where a chase after market performance can lead, it is a hard truth that results count, not just having a nice-looking investment process.
It is sometimes said that investors should not become hung up on issues around performance in portfolios, but it is always likely that there is an element of humbug around this. For sure, chasing performance at the expense of other, wealth management objectives is foolish; it is also unwise to be misled by some of the marketing literature and above all, not to fall into the trap of basing decisions about past performance. But in the end of the day, performance is about delivering the goods. Taking part in the process is not enough; there are no medals for just trying one’s best, however harsh that might sound in today’s arguably over-protective culture. This is the argument of regulator Family Wealth Report contributor Diane Harrison, who is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets. (See a recent article of hers here as an example of her work.) There is more detail on Diane at the bottom of this item. This news service is pleased to share such insights with readers and invites responses; the editors don’t necessarily share the views of guest contributors. Email email@example.com
The mindset of “I’m OK, you’re OK” endorsed by today’s progressive parents who aim to reward their “precious snowflake” children for every endeavor regardless of outcome is a dangerous one to contemplate in investment management. In contrast, meritocracy is alive and well in alternatives. There are most assuredly investment winners and losers, and they are here to stay. Managers must not fall victim to the mentality of “good enough” if they hope to attract and retain investors to their cause.
Investors don’t out medals for taking part
Successful investors are definitely not helicopter parents. They like winning and fully subscribe to the notion of rewarding alternatives managers who can deliver results. Investment management winners by and large try harder, do better, receive more, and keep moving forward. Losers join the ranks of the “once was”, and find something else to do in relatively short order. Managers who want a greater flow of investment assets might take note of the following suggestions to avoid becoming an investment “snowflake”.
Practice doesn’t always make perfect
Performance counts. Practice performance is not the same as performance under pressure. Ask anyone who has taken practice exams with ease, only to crack under the pressure of delivering similar results when scored. Unfortunately, there are no ‘do-overs’ in finance. Monies lost are monies gone, period. For struggling managers, climbing uphill from a steep performance decline is an arduous and often lonely exercise, as investors jump ship and move on to greener pastures, literally,
Establishing a strong and comprehensive risk management process that works in tandem with a solid investment management strategy will help protect managers from unnecessary volatility fallout. For those managers developing a new strategy approach, work out the investment kinks with personal capital before committing precious investor capital to real-time market vicissitudes, and avoid the redemption threat inherent in such action.
Practice what you preach
Add differentiated value. Establish a clear market point of view that delivers value to your investors, and make sure your investment practice mirrors this strategy. The alternatives markets are littered with the corpses of fund managers who said one thing to investors and proceeded to do an entirely different thing with their fund assets. If you are selling your fund as an event-driven equities play, then be sure the portfolio actually comprises firms whose values have substantially changed though identified events or are on the cusp of such events occurring. Don’t be the fund with 75% of your client’s assets sitting in a money market for months or years, awaiting the next ‘great opportunity,’ all the while collecting fees of 2 and 20 for this privilege of earning next to nothing.
No one wants a narcissist for a money manager
Enough is not enough. Dr Jean Twenge, author of “Generation Me,” made an observation in her book that seems simple yet profound. Using data from 11 million respondents and studying an increase in narcissism and entitlement among college students, she noted that children who grew up in the era of participation trophy overload believe that to succeed; you just have to show up. When they reached college, those who were raised receiving these meaningless awards do the requisite course work, but don’t feel a need to excel. And by the time they get to the workforce, they believe that attendance is all it will take to get a promotion.
Let’s be very clear: just showing up is not enough for any money manager to believe they are qualified or equipped to handle investment assets for clients. If a manager doesn’t feel the pressure to perform and the humbleness to know that the markets are a merciless taskmaster to those who expect to win every time, then that manager isn’t equipped to manage outside assets for a living. Investors are entitled to a manager who is fully devoted to doing their best day after day.
Suffering can build character
Turn the tables. The entrepreneurial world is filled with success stories of perseverance. Most people recognize Thomas Edison as one of them. He spent his youth being fired from many varied jobs, including a telegraph company at age 21. However, Edison never strayed from his commitment to inventing. Over his storied career, Edison obtained 1,093 patents. His contributions to technological development are legendary, but his dedication to learning, from both his successes and his failures, is one of his greatest achievements. Imagine if he’d quit trying to improve his inventions after one or two failures?
Money managers who have lasting impact share Edison’s traits of fortitude and introspection. Learning from past mistakes often teaches greater lessons than compounding successes without understanding what created the result. Investors who seek truly great investment partners want to find those who have adapted, refined, and improved their money management skills through hardships. They understand that these are the professionals best suited to react and adapt to the future challenges every market eventually presents.
Excelling feels better than enabling
Balance risk with reward. Last August, the Kauffman Foundation released a study called Making a Successful Entrepreneur. The Foundation surveyed 549 founders of successful companies in high-growth industries and found four key factors that influenced the success or failure of startups. They were "prior work experience, learning from previous successes and failures, a strong management team, and good fortune."
A key take away from this study in identifying barriers to entrepreneurial success was named by 98 per cent of respondents. They cited a lack of willingness or ability to take risks. Distinguishing a calculated risk from a foolish one is a critical skill for entrepreneurs, a trait shared by alternatives managers as well. Despite the popular progressive model for raising today’s ‘precious snowflake’ children, managers don’t get a medal for participating. Investors do keep score, and there are always winners and losers.
About the author: Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets. She has over 25 years’ of expertise in hedge fund and private equity marketing, investor relations, articles, white papers, blog posts, and other thought leadership deliverables. A published author and speaker, Ms Harrison’s work has appeared in many industry publications, both in print and on-line. To read more of her published work in alternatives, please visit www.scribd.com/dahhome. Contact: firstname.lastname@example.org or visit www.panegyricmarketing.com