Fund Managers: Turning Investor Relations Into Big Bucks

If we make money for them, investors will be beating down our doors.

That conventional wisdom for fund managers is starting to look a little bit stodgy and a lot less wise. Welcome to the new new world of investor relations for institutional and alternative fund markets.

The standard of communication considered de rigueur for public firms, vulnerable to stock sell-offs at any time, is now becoming more common in the private asset management world. Fund managers catering to big investors — with deep pockets — are discovering that it’s not enough anymore to just send out a prospectus or other offering document, say whatever it takes to take in the money, and send out monthly or even quarterly statements with facts, figures and pretty pictures.

Institutional investors — namely pension plans, endowments, foundations and family offices — have plenty of choice in where to place their money. In a bull market, they might be more willing to give a fund manager the benefit of the doubt so the old-fashioned standard for investor communication might be enough. But in a market with tighter money, more reasonably concerned investors, and a lot less loyalty, asset managers are having to up their game to attract and keep investors.

Given the financial crisis and Madoff scandal, investors have good reason to fear being mislead or kept in the dark, even by firms they think they know well. Sophisticated investors are taking off the gloves in their demands for information. So are regulators. The Securities and Exchange Commission doesn’t take kindly to fund managers providing what it considers to be misleading information. That’s called fraud.

Therefore, it may no longer be enough to simply deliver bare-bones performance reporting.  “Asset managers need to offer all the non-proprietary information the potential and existing investors might need — and ask for — but make certain to explain it clearly enough so they know exactly what they are reading and what it should mean to them,” says Robert Goldbaum, vice president of product and market strategy for investor relationship management and portfolio management technology provider Backstop Solutions in Chicago.

For some firms, this may require a change in perspective — from the portfolio manager’s view to the investor’s view of what’s important. Portfolio managers are expected to know how to squeeze as much profit as possible from assets under management. But when it comes to communicating with investors, they often make the mistake of thinking that stellar performance is the only criteria for attracting and retaining more assets.

According to a new study released by Chestnut Advisory Group, a Southport, CT-based investor relations and marketing specialist for investment management shops, nothing could be farther from the truth. Surprisingly, the best investment performance raised less than one quarter of the capital captured by the best capital raisers. Instead, the research findings, based on an analysis of 931 asset managers over a seven-year period, suggest that investment education breeds trust, and trusted asset managers were hired three to twelve months more quickly and fired three to twelve months more slowly than others.

Talking Trust

So what does a fund management firm have to do to breed that “trust”? First, successfully explain the fund manager’s pedigree — or credentials — at length for starters. Then reassure the allocators or their consultants that they will be in close contact through the good times and the bad. The potential clients must also understand just how the portfolio manager’s investment strategy has weathered through the bull and bear markets.

That isn’t to say that the fund needs to show consistent performance. That might be ideal, but impractical depending on its investment strategy and timing. A far better idea, says Amanda Tepper, chief executive of Chestnut Advisory: show how the fund performed during good and bad times, and when it comes to the bad times emphasize what was done to mitigate an even lower performance.

What if the fund doesn’t have any performance history during a bear market or financial crisis? It might not be a bad idea to simply say so up front, but offer plenty of concrete examples on the investment strategy that would be taken in the event of a bear market or potential financial crisis. Even better, provide concrete examples of what the portfolio manager has done in similar past situations when managing other types of funds.

Now comes the clincher: just who should the fund management firm assign to interface with the potential investor? It’s a complicated question and the decision could make or break the firm. The smaller the size of assets the traditional fund manager handles — aka a startup or mid-sized fund — the more likely it is for a sales manager, disguised in the form of a marketing manager, to do all the talking. In the case of an alternative investment fund, it might be the portfolio manager.

“Only the largest asset managers, or hedge fund managers, have dedicated investor relations specialists who can bridge the gap between the potential quantitative language used by the portfolio manager and the messaging required to close the deal to win the investor assets,” explains Tepper.

These specialists, often coined portfolio sales managers, are often former portfolio managers who understand enough of the ins and outs of market, counterparty and liquidity risk to explain how they are addressed with potential investors. Investors don’t just want someone who takes a show-me-the-money approach. They are looking for quantitative analysis that illustrates just what they are buying and enough qualitative analysis to be reassured the fund management firm can and will communicate effectively with them.

Working Harder

For smaller shops that don’t have such experienced investor-relations specialists, participating in a potential investor’s evaluation process may become more complicated and time-consuming. If portfolio managers take the lead in representing the fund, they may be able to impress a consultant with their technical expertise, but they could fall flat when it comes to winning over an investment board with varying levels of knowledge.

“They will likely need to bring in portfolio sales experts, risk management specialists, finance and operations specialists to the table through multiple rounds of the so-called due diligence process,” explains Eric Bernstein, chief operating officer in the Americas for alternative fund technology provider eFront in New York.

Once the fund management firm is able to convince the potential client it is worth the investment and the check is written and signed, the hard part starts. Keeping the relationship. Granted, alternative funds and other institutional fund managers do have specific redemption gates which prohibit institutional investors from taking their monies out of the fund at random. Hedge fund investors are usually contractually required to give their fund managers 90 days notice when they plan to cash out. Therefore, compared to their public counterparts, private fund management firms have an advantage in knowing when cash is coming in or going out to ensure the bests cash flow management possible, according to Goldbaum.

Fund management firms which lack the interactive touch are more likely to have a higher number of redemptions and not win additional monies compared to similarly performing funds that do communicate well. For example, a downturn in performance increases the likelihood of redemptions. But that likelihood may be reduced if the fund management firm gets in front of it by explaining the reason for the decline to investors — whether it’s an unforeseen market event or even an incorrect bet on the market.

“Silence isn’t golden and the more proactive the fund management firm can be in explaining market events and their impact to the fund the better the chance it will retain investor loyalty,” explains Goldbaum.

Extraordinary times aside, basic maintenance is needed. That comes down to regular information, presented to answer questions the investor may have or, even better, allow drilling down into more detail. Of course, they want to see monthly reports about just how well their fund is performing, but the addition of performance analytics and attribution, sector analysis and even analysis down to country, asset class and even asset is added value.

Not all asset managers can offer such granular information. In particular, alternative fund managers are more likely to keep their cards closer to their vests to protect their “secret sauce” strategies. But that doesn’t mean they have nothing to say, especially to investors who are concerned about whether they understand a fund manager’s current and future strategy, and may be worried enough to redeem their investment. Alternative funds may just have to be more careful about what details they present.

Relationship Tech

Just how should they go about doing so? “Traditional management firms and alternative fund managers might use customized portals and reporting tools which deliver just the right dose of data with enough flexibility to be sliced and diced as the investor chooses,” says Bernstein. An initiative coined AltExchange has separately come up with standardized XML-based data formats to ensure that, at minimum, institutional investors in various private equity funds can have the same core information presented the same way. That information includes messages on underlying financial instruments, related capital calls and distributions to investors, portfolio companies, revenues, net debt, capital expenditure spending and cash flows.

“The benefit to limited partners — or investors — is the ability to do an apples-to-apples comparison of just how well their investments are performing in different funds and why,” explains Bernstein whose firm offers customized portals and is backing the AltExchange initiative, which also has been embraced by several mega alternative fund managers and institutional investors.

When it comes to the why of fund performance, a more qualitative approach might be necessary. And that is where the fund management firm can set itself apart from its peers. In addition to cold numbers, the fund management firm might provide clearly written explanations of market events and investment strategy. Supporting third-party research reports, videos, and news reports might not be a bad idea. Of course, a phone conversation or two might be in order in the event of poor performance.

How often should communications take place? Again, it depends on the investor’s needs, but as a rule of thumb at least monthly in a stable market. A financial crisis could even require daily contact depending on its impact on the fund.

Regardless of the content and frequency of the communications, internal documentation of investor contact with a solid audit trail is critical to avoid a “he said, she said” scenario, particularly during a time of poor performance. Enter an investor relationship management system such as the one offered by Backstop Solutions which can keep track of all emails and other correspondence and measure just how often they were read and by whom at the institutional investor’s shop.

Fund managers don’t want to be in the position of trying to justify to investors that they were given the correct information on a timely basis. Or that they received fair warning of a potential downturn in performance and explanations of how the fund management firm would mitigate it. “Fund managers also don’t want the risk of sending the wrong investor the wrong statement or correspondence intended for another, which can easily happen using manual processes,” warns Goldbaum.

Investor relationship management (IRM) platforms that track investor contacts also provide reassurance to regulators that the firms are being as transparent as possible, because they can document just what information has been sent to whom and when. “Having systems and structured procedures in place that automate the reporting and dissemination effort is crucial,” says Goldbaum.

Granted, an effective investor relations program doesn’t come cheap. Experienced sales staff, dedicated communication specialists, and supporting technology cost time and money. And there are no guarantees. What is known is that if the fund manager doesn’t communicate well with either potential or current investors, its likelihood of acquiring and holding onto investor money will be reduced.