Sometimes insightful, occasionally entertaining, this page is dedicated to periodic articles that matter (WELL, to me anyway).

THE FUNDAMENTALS OF GROWTH: COMPETITIVE RETURN PATTERNS

In order to achieve sustainable, profitable growth, three things must come together: Competitive Return Patterns, Distribution Positioning, and Investor Appetite. This post will address the first of these, and is fairly brief as I won't attempt to catalog the many forms of competitive return patterns. Recognize that not all prospects are looking for the same thing, know which tend to desire the attributes associated with your investment discipline, and focus your efforts on those prospects. Don't know who is likely to be responsive to the return patterns you deliver? Call me!

I do have a few related points that, for many small and emerging managers, seem to get lost as they contemplate the sale of their products. The first is the most basic: Beating the benchmark is only a starting point (albeit very important). Beating your peer group is another great but insufficient achievement. Depending on the buyer, one or the other of these might be more important. Or maybe both are important. And it could be important that you beat on a recent 1 year, or 3 year, or 5 year basis, or that you beat it consistently, say on a 1 year or 3 year rolling basis. Of equal importance is your ability to simply and clearly demonstrate how your investment discipline enabled this superior record. How is it that what you did beat the bench, or your peer group? Be prepared with specific examples, and in particular explain how your repeatable discipline enabled you to find and execute against these opportunities.

Note that you don't need to be the best; indeed, it is impossible to determine the "best" manager simply by reviewing return patterns. You do need to be good enough to get to the table, though, and from there, in order to win a mandate and retain clients, you need to be better than your competition at sales, which (perhaps with my help) you can do.

I use the term return patterns for a specific reason. Increasingly, buyers (especially professional buyers, the ones who select managers for someone else and get paid to do so) are focused on risks, meaning both the shape and volatility of returns associated with a managers discipline, but also risks inherent in consistency of the discipline and even broader, firm-level business continuity and cultural risks. Many will subject your historical record (I've had prospects request holdings going back many years, and have fielded inquiries as to why we held this or that security 5 (or more!) years earlier) to review using their own independent methods to assess this risk. Certainly the common MPT statistics are used. Know yours, and be prepared with cogent explanations for why your Information ratio is what it is, or Sortino or whatever. But be aware that your discipline and the consistency of this discipline could also be subject to scrutiny.

I believe there are a couple reasons for this risk scrutiny. One is that the analyst has a fiduciary reason to understand the variability of returns against whatever expectations are. This makes sense, especially as portfolios are steadily moving towards more sophisticated methods of delivering outcomes. If, for example, your discipline creates a lumpy return pattern driven primarily by capital appreciation, an income-oriented portfolio might rationalize inclusion on the basis of inflation protection, but must be able to predict the return pattern's effect on the portfolio total return.

The second reason for this risk scrutiny is a bit more subtle, but no less real for it: The analyst faces career risk if their picks don't meet expectations. Remembering (from basic behavioral finance) that a loss has a substantially greater emotional impact than an equivalently sized win, it is easy to see how the ire of an investment committee is much more troubling than their enthusiasm is rewarding. This naturally drives an analyst toward a recommendation that they hope does well, but are quite confident won't disappoint.

So be prepared to to discuss risk, which means not just the impact of your return pattern on the client, but also the impact of your return pattern on the career trajectory of the analyst. And for goodness sake, if an analyst stands by your firm during a period of under-performance, do everything possible to support them and make their job easier. This is absolutely critical to sustaining your AUM (and profitability) and it is also just the right thing to do for another human who "has your back". This is a VERY important job for your distribution team, and it begins with an understanding of my final point...

Know your prospects (and clients) criteria - what their expectations are - for you. It is true that many 401(k) plan sponsors have similar expectations for their managers, and these are different from, say, family offices. But every buyer will have unique experience and thus criteria, and every analyst will be at a different place in their career. Your sales pro must be all over these details (I will discuss how to discover these "game-changers" in a future post). Knowing them is not enough, of course; shaping every presentation so that every presenter can tailor the articulation of your firm's capabilities in such a way that the buyer can make the best, most informed decision is critical. This is how you win the right clients for the right reasons in the first place!

On a not-too-incidental side note, it is infrequent that the sales professional is effective in sharing this perspective with others on the team. Not many sales people are all that great in getting detailed perspective on risk/expectations in the first place, but also because it is unusual in the typical IM firm culture for a portfolio manager to consider themselves subordinate to the perspective of a sales pro. Perhaps this is fairly earned, but do yourself and your firm a huge favor by ensuring that presentations are prepared, rehearsed, and customized according to the critical client-specific perspective gleaned by sales.

Next time, on to the question of Distribution Positioning.

Dave

THE FUNDAMENTALS OF GROWTH

AUM growth does not happen by accident. As with all market forces, there are critical drivers that come together to enable or prevent the kind of growth your firm deserves. What are these forces, and how can you manage them to your advantage? This question is at the heart of how I think about the discipline of distribution, and why I believe that, if you pay attention to the details of managing your business, you can achieve the goal of sustainable, profitable, growth. I will be writing about each of the three factors I use to build plans for sustainable profitable growth in future installments, as each deserves its own space. To satisfy the impatient among you, here they are: Competitive Return Patterns, Distribution Positioning (this is where I will spend the majority of my time) and Investor Appetite.

Before we get to these factors, a quick word (or two) about this idea of discipline. It is well accepted that an investment philosophy must be disciplined (my comments refer specifically to active managers). What exactly does this mean? Contemplate this question carefully, from a buyers perspective, so that when asked you will be well-prepared. 

"Investment discipline" refers to the method or process by which you discover a security trading for less than it will be, and how you exploit that mis-pricing for the benefit of your clients. The discussion could include topics like information gathering, and how your process is unique (onsite management team meetings are commonly cited), and forecasting (proprietary earnings estimates, for example) which must inherently get at the length of your time arbitrage. It might include your trading expertise, or leveraging methods, or how you avoid market risk. Perhaps you have developed an algorithm that determines relative value...whatever the elements of your discipline, an astute buyer will be seeking to discern if your record was caused by the discipline, or by factors external to your discipline (I don't believe in luck), and will be asking themselves whether they believe this discipline will work to their advantage during their holding period.

A very close but distinct question is how your discipline is unique and unlikely to be found in another manager's process. Your presentation should call these out, as it is ideally true that your discipline is both effective and unavailable elsewhere. I have found this to be a tough question for many sales professionals: "How is what you do different from your competitors?" Answers are often lacking in specificity and objectivity.

Discipline is also commonly accepted to include a sense of consistency. Do you adhere to this process throughout a market cycle? If not, why not, and how can I be confident that a change in your core discipline will happen at a time advantageous to me? How should I think about your approach in contrast with other managers within my portfolio if your discipline does change?

Discipline rarely includes a conversation about how you examine the effectiveness of your methods, however, and it is this aspect of discipline that I want to call out. I have run a few marathons, and know that to improve my time, I must focus on those aspects of my training that can make a difference - I must examine the effectiveness of my training discipline. Training in the same fashion as usual and waiting for the race to find out if I'm faster is substantially irrational. Similarly, an asset manager should examine the effectiveness of their process, and do so consistently. Waiting until the end of a period to review performance as the determinant of effectiveness is similarly irrational. This gets at the common RFP question: "How will your results differ across various market conditions?". Most answers are vague (deliberately so, no doubt), and I suspect experiential, not causal. It is rare to find a manager who objectively examines the efficacy of their own discipline.

Be that as it may, here is my point in this discussion about discipline: To be your best in any endeavor, you must be disciplined about your discipline. It is not enough to work long hours doing what you do...you must work a few more to discern whether it makes a difference. And this is certainly true with regard to managing the growth and profitability of your firm. Create a plan, and persevere in the focus brought by a plan, but examine its effectiveness as well, and adjust as called for over time.

So then, what are the factors that will define your firm's growth trajectory? Knowing them, how can you enhance the likelihood of your success? And how can you be confident that your growth pattern is what it should be, given these factors? My next several installments will propose a rubric to frame an answer to these questions.

Run the race well,

Dave

Three things I Thought we all knew by now

I recently listened to several sales presentations from well-known firms, competing for a substantial mandate. These firms had been vetted via a sophisticated multi-step process; all were more than qualified on paper. The decision as to which would win the mandate really did come down to the presentation.

A finals presentations! This is a thing most of us want more of in our professional lives. And it requires real competency to earn the opportunity to give that final presentation. All the work put into getting to this point, and it comes down to whether or not the candidate firm is able to make a real connection with decision makers. Custom pitch books are assembled, sales prepares a scenario analysis, presenters are prepped and ready, and planes are boarded...right?

I've given a lot of sales presentations over my career, and I've coached a whole lot more. It is fascinating to me to move to the buyers side of the table and experience what it is like to be a recipient of these presentations. And there are a few things I am learning with a new urgency. Let me share three of these with you, and I doubt that any of them will surprise you. The question is what you will do with this knowledge...

1) Know Your Audience:  I know you are unlikely to be impressed with this oh-so-insightful observation. But the importance of this idea cannot be overstated, and the effectiveness of different teams is remarkably disparate. Don't miss this point: Knowing your audience well is a massive opportunity for you to distinguish yourself from your competition. And I believe it can be done pretty simply (if not easily) by ensuring you're aware of a few key areas. Let me give you two of the most important.

     A. What does your prospect want or need from your portfolio? I have found it compelling to ask a prospect what they would find valuable about my work when looking at it from a future standpoint, say three years out from now. The question might be this: "If we do some great work together, what will this mean for you three years from now?". Begin the finals presentation by stating these goals (be certain you have them right!!), and use the pitch to illustrate how these attributes will be delivered.

     B. Have some familiarity with all the players, not just the point person. It is easy to feel good about the relationship your firm has with an analyst or even their team. But the final decision-making group is going to have a very strong inclination towards the finalist who connects personally with them - remember that any of your competition is likely to be a completely sound alternative to you. Personal connections at the final is difficult, as these meetings are highly structured and typically time constrained. Be sure your sales professional is doing everything that can be done beforehand to build legitimate and appropriate relationships. And during the pitch, try to personalize your communication to each person; know their names, and have a sense of the context for their role and background. I promise you, this will be a differentiator! Obviously, don't be obsequious or overly informed (aka a stalker), but know the basics. LinkedIn is a very powerful tool...

2) Manage Your Ego:  Not every presentation will be given to people who know what you do, so don't expect them to operate at your level. This may be frustrating, but must be dealt with. Every organization has its reasons for why this individual has decision-making authority, and you simply have to accept that. Be respectful and considerate, speaking neither above nor below, and pause frequently to ensure you are on point. This is pretty simple, really. Respect and courtesy; that's it!

3) Get To The Point:  This is a tough one, as you know so much, your work is involved, and you are passionate about what you do. You probably can't wait to demonstrate the depth of your capability, and I get that! In fact, that enthusiasm is often a really important element for decision makers. But time is always finite, and if you have a plan for talking points that address the buyers key criteria, you should manage your time so you get to all the critical points. If a question takes you off course, you must respond to it. But if you take time to tell an involved story to illustrate a point, you may be doing yourself more harm than good.

Let me wrap up by recognizing (again) that these are probably not new ideas for you. And yet, these were significant contributors to the decision to award one firm a substantial new mandate, while the rest were left to wonder what went wrong. It is often not the BIG NEW THING that makes the difference between winning and losing, but rather the excellent execution of the thing we already know.

Speaking of wondering what went wrong, look for a future post on the incredible power of being honest with yourself...not always much fun, but the only way to be the best possible version of you.

Best wishes for many successful finals presentations,

Dave