Monday, January 9, 2017


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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