Institutional
investment managers are often bought like portfolio managers purchase
stock. And just like those
portfolio managers, institutional investors need to apply discipline,
intentionality and insight to avoid the curse of buying high and selling
low. To the frustration of
investment managers, even large and sophisticated plan sponsors can fall prey
to this trap by hiring managers who are in favor only to hire a new flavor of
the month who exhibits (temporarily) a better performance record, often harming
the overall performance (and risk profiles) of their own plan assets. This interaction of behavioral finance
and agency costs can create a truly lethal mix that combines suboptimal
performance, hidden transaction costs and the potential to stand in direct
conflict with the institutional investor’ fiduciary duties to its plan
beneficiaries.
While the trap
has severe consequences for the institutional investor, what can institutional
investment managers do to avoid getting caught in this trap?
Remember the complexity of the institutional investment business. The institutional
investment business is composed of institutional clients, investment
consultants and investment managers, all of which rest upon a foundation of
money and people. With the
potential amplification of human failings, even among experts applying their
best intentions, the complexity can quickly rise to a whole new level. It is important to monitor and respond
to the flow of information and carefully consider what motivations are
operating and how resources can best be deployed.
Create and maintain awareness of your firm. It is important to never
become comfortable that the investor’s assets will always remain in place. Keep reminding investors of your firm’s
style, what differentiates you in the marketplace and what are the highlights
of your value proposition. This
can be accomplished through firm overviews, client reports and database
updates.
Develop and refresh familiarity of your team. Good institutional
investment managers need continual renewal to avoid complacency and continue to
speak to current issues in the investment marketplace. This entails review your specific
strategies and developing your thought leadership. This can be further accomplished through strategy specific
overviews, pitch books, thought leadership papers, speaking opportunities and
consultant educational events.
Establish and confirm favorability. Maintaining a fresh view means staying
in the minds of prospects, consultants and current clients in direct contrast
to your competition. This is
accomplished through an established and consistent RFP/RFI process, solid
finals presentations, thorough database management, accepting and incorporating
market feedback to your message and regular client and consultant reviews.
Following an
intentional process and executing the above steps will allow institutional
investment managers to best defend against the natural attrition of
assets. While you may think your
clients and consultants understand your story, a wise manager works hard to
ensure that their client and consult base remains well informed as to why their
style remains an important part of their overall asset allocation.
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