If one were to believe everything they read, one might believe investment managers and their investor clients come from two different planets. While there are real differences – over the long haul – both are investors with similar goals.
- Produce Attractive Absolute Returns. Active managers are paid to compound returns – not to replicate an index at the lowest cost possible. All investors move on to the next opportunity if the manager fails.
- Generate Alpha. Active managers and their investors are competitive and demanding. No one wants to be in business with a firm that has no reasonable edge relative to a very low cost index fund.
- Build a Terrific Team with Low Turnover. While managers want to have the best team they can, stuff happens. A manager may have to replace someone well-liked by their investor base. This can be particularly challenging if the manager believes it is a plus when this well-liked professional is gone. On the other side, when investors themselves have high turnover, the manager has to essentially sell itself repeatedly to that investor.
- Create a Stable and Happy Investor-base. This is an interesting point many managers do not fully comprehend. Ideally, most investors prefer their managers simply perform and remain invested. Investors will require additional support from their managers during poor performance to keep their own clients or board members calm.
- Maintain Effective Two-Way Communication. The best managers keep regular and timely contact in good times and bad. The best Investors communicate their concerns as well as internal issues they face to their managers.
- Generate No Unwanted Publicity. The investment world is very different than entertainment in that the adage “all publicity is good publicity” in no way pertains. Many, many managers and allocators have found their businesses and careers derailed due to a relatively small amount of negative publicity. If it does, address it.
- Eliminate Catastrophic Risk Management Failures. Successful investors know every single strategy and manager suffers periods of underperformance. These are explainable. Sustaining losses from risks you have never mentioned and/or repeatedly dismissed, will shrink your investor base.
- Lower Correlation to Related Long-Only Indices. Over time, active managers must demonstrate they are doing something with the fees they receive.
- Create Manageable Growth in Assets. Investors and their boards gain comfort when others join them. What most investors do not think much about is managers like to see their investors’ businesses grow as well.
- Early Commitments are More Significant. Commitments to emerging managers can be the start of a career changing relationship on both sides. Committing to a multi-billionaire, not so much.What does this mean? When you meet up with a potential investor (and vice versa), remember that you are in this together.
Douglas Newsome, CFA
Managing Director, Director of Research
Perkins Fund Marketing