The following post is courtesy of Diane Harrison who is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.
A decade ago I wrote about the struggle emerging and smaller alternative managers had attracting capital to their funds, as they were being overshadowed by the ‘whale’ managers who garnered all the interest and the funding. I’m happy to report in 2022 that this situation is not as dire as it once was, as investors have grown tired of bloated fees and less than stellar results from the largest players, and are more interested in learning about the niche funds and sector stars across a wider universe of alternative investments.
But what hasn’t changed, and I highly doubt will change in the determinate future, is the need for clarity of message to the most important component in this communication: the ultimate investor. What are you offering and why does it make most sense for me? I thought I’d resurrect the arguments I made 10 years ago for this focus but present it in a more compelling way.
CONVICTION VERSUS CLARITY
|A fund manager has multiple investment goals and objectives to factor and weigh as he conducts his business, which at the core is investment management. He must evaluate a myriad of issues as he executes his strategy, not the least of which include liquidity, risk management, position sizing, and trade identification and execution, all while adhering to his style and stated investment objectives.
A manager assesses and weighs multiple factors as he operates within his strategy, making the most informed decisions possible and adjusting to a globally-challenged market environment to the best of his abilities. He operates with conviction—sometimes more strong than at other times—but he does the best he can with a dynamic market situation and lives by his skill at executing that conviction.
|An investor, with very few exceptions, operates with a balanced view towards preserving capital while achieving some measure of return. The risk/reward profile varies for each, but always includes a component of protection. In seeking to partner with an investment manager, most investors are highly concerned with the ability of each manager prospect to convey this downside protection component in their discussion of investment strategy. The investor needs to be convinced that every manager to whom they allocate money will be working to preserve their capital first before focusing on building the investment to greater heights.
In short, the investor is looking for clarity of purpose in their manager prospect. “Are you on the same page with me in terms of protecting the downside? Will you be focused on keeping what I’ve given you before committing my capital to a direction that will be at risk?” This is not to imply that the investor doesn’t understand the general purpose and goal of making an alternative investment allocation. It’s more about the investor psychology that compels the decision-making process for both investors and managers.
CONVICTION VERSUS CLARITY
|Managers focus on making decisions with conviction. They essentially make their living off of demonstrating this skill over time, weighing factors and, on balance, making many more successful decisions with desired outcomes than unfavorable ones that require regaining of ground to move forward.
Additionally, managers are paid to make investment decisions. Their stated objective in investment management is to be managing capital consistently in line with a strategy for which they are paid.
|Investors make decisions with a desire for clarity. They want to feel as comfortable with their decision as possible before committing to a new cause. Change is uncomfortable in many areas, not the least of which is in allocation redeployment.
Investors have no compunction to be active in the markets. They have varied investment goals and objectives, but are not generally focused on being actively present in the markets at all times. They are, however, keenly focused on wealth preservation. Their primary investment drivers may include legacy planning, charitable funding, and other personal goals, but all require a focus on downside protection from erosion of capital.
The orienting response, which I referred to in the title of this post, is an instinctive reaction to a stimulus. In essence, it’s the hard-wired reflex that is your default mechanism. It may be that investment managers and investors are just wired differently. In essence, this difference in the way each side views investing may be at the heart of why it takes such effort and so long to bridge the gap between managers and investors in allocating capital. They aren’t working at cross purposes, but at times it feels like they are communicating with each other from across this conviction versus clarity divide.