By Diane Harrison
While watching the recent Congressional Benghazi hearings drone along at a glacial pace, it seemed that the verbal maneuverings and utter lack of candidness bore an eerie resemblance to the spin-doctoring that managers sometimes fall prey to as a defensive mechanism when asked tough questions by investors. Investors have a keen ear for picking out weaknesses in a manager’s story, and a long memory for information shortfalls or gaps in the aftermath of a meeting.
FAILING TO PLAN IS PLANNING TO FAIL
Handling hard questions is a necessary skill for all managers to master, particularly managers trying to impress new investors. To avoid the painful pitfalls of doublespeak that Congress seems to enjoy to excess, the following examples may help managers proactively think through how to handle critiquing their own portfolio management. Preparing in advance of these conversation will help managers do a better job addressing the tougher issues that investors query them about in meetings.
- What are two of the most pressing issues you face in today’s markets? How do you position your fund to handle them?
This is an opportunity to offer investors a glimpse into the manager’s outlook and unique view of market forces. The answer will, of necessity, need to reflect the current environment and therefore be constantly evolving. But the ability to speak with an investor coherently and intelligently in the context of a manager’s portfolio management practice brings a real-time focus to every discussion and will be a memorable piece of the meeting upon which investors will reflect.
- Over the past year, and over the past 3-year period, what was the path of your performance if we looked at it on a monthly basis? Did you have one or two really good months that accounted for the majority of the performance? If so, does that fit with your strategy approach?
This question is easily answered by performance numbers, but the conversational context is critical to frame individual answers for managers. There are strategies where it might be perfectly acceptable for one or two great months in which large profitable trades carried the portfolio, such as opportunistic approaches in breakthrough innovations that offer outsize payoffs when realized. But for the types of strategies that involve a diverse basket of positions realizing their intended goals over time, a smoother performance path would be more in line with investment expectations. Managers should review their numbers and frame their discussion points about them in a way that relates solidly to portfolio investment goals, as investors are looking for a greater understanding of what potential path their future investment might take.
- What was your worst drawdown (peak-to-trough) and how long did it take to recover? What caused it?
Be prepared to address this issue with both the numbers and the situational dynamics of how it occurred. It’s not necessary to offer this up unless asked about it, but it should be showcased as a learning opportunity. Did it lead to new limits for trades? Was the risk management process refined in the wake of the issue? Was leverage involved, and if so, was it altered going forward?
- How do you make investment position decisions in your firm? If you are the sole decision-maker, how to you self-govern these decisions in your risk management process?
For portfolio teams with multiple members and for strategies that have quantitative, systematic controls built into the trading process, this is a fairly routine issue to address. However, this is a tricky issue for a manager who hasn’t got an investment team in place yet. If the portfolio manager is also the chief risk officer responsible for implementing controls, being able to articulate a predefined, consistent set of principles based on objective measurements and quantitative factors will go a long way to mitigate the investor concerns that such a scenario could raise.
- What’s your maximum exposure in the markets you trade? How often do you position the fund’s overall exposure near those limits?
Managers often seem surprisingly reluctant to talk about the limits of their strategies. The reason investors want to explore this issue is to learn more about the manager’s discipline and lack of investment hubris. Infallibility is a quality no manager can claim, but acknowledging that limits are a vital and critical component of a long-term investment process is one quality that every manager should get comfortable talking about relative to their approach. Specific discussion points on this issue can be a powerful marketing advantage with investors.
- What is the average holding period for your portfolio positions? What is the current holding period in your portfolio today by position?
This is another seemingly simple question that throws managers off when asked by investors. The general intent in asking for this information is for investors to understand better how the strategy functions through market trends, volatility, and stagnant periods. For example, investors want managers to talk about how the universe of investment options might be impacting sourcing new opportunities or how existing positions might fulfill an investment thesis. If a manager has an average holding period of 6-12 months but the current portfolio’s positions are significantly under that time, then the explanation should address market forces which are impacting the turnover rate’s increase.
MEAN WHAT YOU SAY, AND SAY IT LIKE YOU MEAN IT
There isn’t anything revolutionary about being honest and straightforward; most people would like to believe that they are that way the majority of the time. But, much like politicians facing a Congressional hearing, the pressure of needing to persuade strangers can sometimes wreak havoc on managers unprepared to handle some of the harder issues investors want to explore. Taking the time to think through these areas and practicing appropriate, detailed responses can yield benefits far beyond the mere avoidance of underwhelming an investor. A strong performance can lead not only to new investors, but additional referrals from advisors and stronger relationships with existing clients as well.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 25 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2015, Panegyric Marketing received AI's Business Excellence in Strategy & Positioning Statements - USA | Best Financial Services Marketing & Communications Firm | Innovation in Asset Strategy | M&A's Excellence in Financial Services Marketing - USA | Best in Financial Services Marketing - USA | Wealth & Finance International's Excellence in Thought Leadership – USA. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line. Contact: dharrison@panegyricmarketing.com.