Client Communication: Defend Passionately
Defend performance and retain revenue is probably a buy-side problem emerged during the most recent financial crisis. Sell-side has only more explanations to do, but most of their job is done when capital is raised, stock sold, and the merger happened. But as a fiduciary asset manager, you have to engage another step where you have to deal with clients who are unhappy with the performance of their portfolios.
A Wall Street trader once told me, the investment management industry is the most ridiculous industry of all. Who in the world would give you the money to manage and pay you for doing that, no matter you win or lose? And the next issue raised amid the financial crisis when everything went to shit is the debate on the whole “compared with the benchmark vs. absolute return” idea. If benchmark went down 20%, and you went down 15%, on a relative basis you’re still outperforming but essentially you are losing money for the client.
But what will piss off a client even more is when they have several external managers, and one of them simply falls behind the other managers, regardless of the market direction. Every client-facing person in the asset management industry would have faced situations where you have to defend your portfolios as well as your firm’s reputation in the past two years. So how exactly do you do that?
Explain what happened and what went wrong
The first rule is to defend without getting defensive. Portfolio managers are humans so they make mistakes too. Sometimes it’s market timing, sometimes it’s a wrong judgment on a sector’s outlook, sometimes it’s a biased assessment on the recovery rate of a distressed security, but basically there is something else that went wrong besides the market itself. Acknowledge it, explain it, and move on. The fact is what’s done is done and cannot be undone. Ultimately, you should have the ability to direct the client to look forward.
Incorporate improvements but stick to your philosophy
You may admit you made a bad trading decision at some point, but it’s probably not a good idea to give the impression that you have no faith in your investment philosophy, or just because your performance last year was not as good as your competitors, you want to re-write your whole investment process. It will be beneficial to build up a more cohesive, robust trading platform and operational system, but you should stick to your philosophy. After all, having a philosophy is better than not having one, and changing your philosophy back and forth = not having one. And that is scary.
What do the clients really want? Industry leaders and Consistency
Why should you stick to your investment philosophy even though it might not have worked as well in the past year? Because you believed in that philosophy previously for a reason, your firm’s very foundation might be built upon that philosophy. Making big bets on duration/curve or weighing more on relative value (asset allocation/security selection) can generate hugely different results under certain market conditions, but that is exactly how you differentiate your firm. You don’t want to be a No.2 in your competitor’s field; you want to be the leader in your own arena.
Adhering to your philosophy will also help you to explain how you will be able to deliver consistent risk-adjusted returns going forward, especially if you’re dealing with large institutional investors. A central bank or an insurance company will not like a situation where returns jump from -100bps, to +250bps, to -90bps. They would appreciate +15bps, +25bps, +20bps much much more. Furthermore, they need to explain their external manager picks to their own senior management.
Give them a consistent story to tell: maybe not the most brilliant one, but definitely a very good one.
What to you think of the asset management industry? Have you also encountered situations where you have to defend yourself professionally?
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An Advice A Day - What Danye Says 
Thanks for sharing, I really enjoying reading your blog!
But what do you like the best of asset management industry?
Hey thanks for the comment. I guess there are 2 things. first, people are generally nicer in buy-side firms and the culture is more flat (sell-side tends to be more intense as we all know). second, you feel you’re constantly learning and growing. it’s really a fast-changing industry and there are new chanllenges you have to face and new solutions you have to come up with. it keeps things interesting 🙂 does that make sense?
Yes, got it. Thank you again and I look forward to reading more advices!
Thank you too. I’m glad you liked it. let me know if there’re any other topics you’d like me to write about 🙂
:If benchmark went down 20%, and you went down 15%, on a relative basis you’re still outperforming but essentially you are losing money for the client.” I couldn’t agree more!
Most money managers use it as an excuse for losing money. A good money manager should never lose money on Monthly or yearly basis regardless the direction of the market.
Analyst comes in two forms: fundamental and technical. IMO, fundamenetal-only analysts can not really make you money when the market is good, but what’s more important to know is that they can’t really save you the money when the market is bad. However, technical analysts can not only save you money when the market is bad, they can also make you money.
The fact is, good money managers are only handful out there. If you can find the one I described above, make sure you stick with him or her. ^^
hey thanks for commenting in such details. I just want to point out that I don’t agree that money managers use this as “excuses” because this is the very nature of the active asset management industry. The very rules of this industry may have their own flaws but it will be unfair to accuse those who actually play by the rules.
Also, it’s probably more common for a manager to employ both fundamental and technical analyses. Each approach has its own advantages as well as disadvantages, analysts may have their own focus, but a good portfolio manager should be able to combine both technical and fundamental opinions and decide when to rotate between the two, and how much to weigh on each analysis.
Finally, it will be very hard for a money manager, no matter how good he is, to ALWAYS make money. There will be wrong bets, there will be short-term losses. the important thing is that if you can deliver risk-adjusted returns in a consistent manner. And when you deal with large investors, a robust trading system with a solid operational platform also matters.
Anyway, I would always remember one thing: if something is too good to be true, it probably is.
WoW. I will try to answer your comments paragraph by paragraph.
1. Most of money managers DO use it as an excuse. I clearly remember that when I spoke to fund managers, especially during 2008 and early 2009 period, they always mention that the market is down ***% verse how much their fund is down. However, during 2009, especially after March, all the fund managers I’ve spoken to only mention they are up certain %, WITHOUT mentioning the market was up 68% the whole year. And most importantly, most of them didn’t make a return of 68%, if not less. See my point here? It is not the flaw of active asset management. It is the flaw of investment methods they use. One of the best money manager I know has guide his company through 2008 and 2009 and made extraordinary returns during the 2 years period.
2. It’s very UNCOMMON for a manager to employ both fundamental and technical analysis. Majority of fund managers are fundamental only. However, IBD (Investor Business Daily) shows that the best performing fund managers are always the ones that use both Fundamental and technical analysis, which there are really not that many.
3. It is not hard for a good money manager to always make money. That’s why I mentioned on monthly or yearly basis. Of curse they will have wrong bets, or small daily losses due to the market fluctuation. But with a rigorous risk management discipline (which I think we will need a lot of discussion on this topic in the future), it is really hard to loss money. Risk-adjusted return is a really vague and static concept because it doesn’t take into account the managers own capability of managing risk.
There are something out there that is good and true. The real question is: If I can do what I just said above, would I be willing to share with everyone? = P
Good discussion. Keep it up!
1. Active money managers ALWAYS manage the portfolio against the benchmark. your example of not mentioning the market went up for 68% does not make sense because if the portfolio didn’t go up more than that, it will NOT be outperforming the benchmark, and on the reports to the client under active returns it will clearly be a negative. I don’t know who are those fund managers you talked to but your experience is not representative because this is clearly not the industry convention.
2. I agree that most asset management firms weigh more on fundamentals (which probably makes sense given their longer time horizon) but many portfolio managers I personally know do also look at technicals, which will be incorporated into their investment strategies and trading process. It will be very surprising to me if those who have been in the industry for years and decades would not know it will benefit them should they employ both analyses.
3. “It is really hard to loss money”. I do not agree with you, and I don’t think many will. But I am very impressed you have this confidence and it seems you have access to really good things. So best luck with everything.
Consistence is the key. I agree that with good risk management it is hard to lose money because multi-year studies on random entry with excellent risk management has
confirmed that. Of cause, random entry does not make a lot of money.
The problem is a lot of people focus more on short-term gains, which is understandable as PV always values more. But honestly you just can’t get everything, so you have to weigh your own options, right? 🙂