With over 25,000 open-ended mutual funds available for sale in the United States, it is more difficult than ever to stand out from the crowd. While some of the giant money managers can afford to build brand-name recognition via big advertising and sponsorship campaigns or armies of salespeople, many cannot. However, there is one area where the playing field is evened out and a small boutique shop can outmaneuver a large manager. That area is the communication of performance history.
1. The numbers should tell your story.
It isn't enough to simply calculate a standard set of performance metrics like alpha, Sharpe ratio and standard deviation and assume the audience understands the significance of the numbers and how they relate to your products. Rather, the numbers are the proof statement to back up your story. For example, maybe the product you're managing is conservative by nature. If that's true, you might see the product lag in up markets but should see performance hold up better in down markets. The up capture ratio and down capture ratio, respectively, are good ways to illustrate that story. The numbers are a means to an end, and that end is your story.
2. Keep it simple.
The second goal is to make your story understandable to the widest audience possible. The best way to do that is to keep it simple. For example, perhaps your strongest selling point is consistent excess return versus the benchmark. Technically, the best measure of consistency of excess return is a statistic called the information ratio. But what if your audience isn't familiar with that statistic? Do you want to spend your meeting explaining how a statistic is calculated or would you rather talk about the strengths of your product? It is likely that you could illustrate that same point by showing your product beating its benchmark in eight of the last ten calendar years. That's a graph everyone would easily understand.
3. Work from simple to sophisticated.
There certainly are more sophisticated investors who understand higher level statistics and are expecting to see the metrics used in CIMA-, CFA-, or CAIA-level analytics. You don't want to alienate those clients by not having advanced analytics available. While it is a good idea to include the more sophisticated information, it is best to keep it towards the bottom or back of your materials. I call this "climbing the ladder", where the sophistication gets ratcheted up in small steps from the most basic information to the high-level analytics through the course of the presentation.