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.
Sharing your performance with a client or prospect is not about cranking out a fact sheet or a PowerPoint presentation full of numbers. It's about telling your story as a money manager and what makes you unique. With that in mind, there are certain rules of thumb to make this process effective.
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.
4. Pictures are better than numbers. The old adage, "A picture is worth a thousand words" is certainly true when it comes to presenting performance. Most people are more visual than numeric, so if you want to illustrate a point, the best way to do so is with a clean, simple, elegant chart in which the story is immediately obvious. This is better than having the audience sort through rows and columns of numbers to pull out the relevant information.
5. Have it your way. For better or worse, the financial industry has settled in to a standard way of looking at performance. There is a standard set of benchmarks used for comparisons: the S&P 500, the Russell 2000, the Barclays Capital Aggregate Bond, etc. There is a standard set of metrics everyone uses, like Sharpe ratio, beta or alpha. Everyone looks at the same time frame: the last one, three, five and ten years through the most recent date. But by limiting the variables, one loses much of the insight that can be gained by looking at the numbers.
For example, maybe the product you're running is a small/mid cap or "SMID" manager. In such a case, a more obscure index like the Wilshire 4500 or Russell 2500 would be more appropriate, so why not use them? Or perhaps the product you manage is a go-anywhere, invest-in-anything strategy. In such cases, a beta or an alpha versus a single benchmark is meaningless. So why not use absolute return metrics or capital preservation measures to tell your story?
Maybe the great story behind your product is how well it holds up when markets crash. If that's the case, showing performance during the credit crisis period from August 2007 to the bottom of the market in February 2009 would be a much better way of understanding bear market performance than looking at an annualized five-year return.
None of the above rules of thumb will change the actual performance numbers. The numbers are what they are, and if the performance is poor, nothing can change that. But what the above ideas do is allow you to explain why the numbers might have been bad and help your audience understand the context. If your numbers are fundamentally good, these ideas allow you to put your best foot forward and help your products stand out in a very crowded marketplace.
Marc Odo is Director of Applied Research at Zephyr Associates.