The biggest mistakes fund managers make when dealing with selectors

This essay appeared in Citywire Selector on April 29, 2010. 

The manager meeting is the crux of the selection process. For selectors, it is the link between a fund’s historical record and its future potential, by understanding the direction a manager is likely to take the fund.

While meeting with the actual decision maker of a fund is the single most important point of interaction for selectors, they also meet with a number of other key representatives.

Each function at an asset management firm can be important in the process of developing and maintaining relationships with selectors. It may be sales staff, or other members of the investment team, including product specialists and client portfolio managers, or members of the firm’s executive management.

Selectors benefit from getting a 360-degree view of a firm and its products. Meeting a wide range of staff can be very important in gaining an insight into plans for growth, new developments, and to get a read on changes in organisational stability.

Though the most crucial and immediate information comes from the portfolio manager, other angles can provide a tremendous amount of important information and can also help to identify potential problem areas through any inconsistencies in the story.

The primary contact point for selectors is typically the sales representative, who is often key to the relationship.

I call it a relationship, because that is exactly what the connection between selectors and asset managers is – or should be. In the world of active management, the human factor is the single most important driver of decisions.

The selector is most often not simply buying a product based on readily comparable information, but engaging in a relationship with a portfolio manager and their respective firm. Managing expectations on both sides of the relationship between the individual selector and the asset manager is crucial.

As all selectors will recognise, there are very clear differences in the quality of asset managers. These differences are not limited to the relative investment factors but also how they provide a service to selectors.

From this perspective, the well-equipped and successful firms start by having an understanding of the selection process. They know the importance of the selector’s role and seek to provide information and support accordingly. They recognise the particular challenges of the job and seek to alleviate some of the pressure points through timely flows of information, with honesty and transparency.

Asset managers who have not figured out a strategy for liaising with professional buyers of their products need to do so. Understanding the selection process and the mindset of the selector is crucial for success.

My bet is that given changes in regulatory environments, competition and the complexity of the investment environment, professional buyers using a highly sophisticated institutional selection process will be the norm across investor types.

It is remarkable how many managers are completely uninformed about the basic tenets of the selection process and the mindset of selectors. Successful asset managers have been quick to recognise they must adjust their sales pitch to meet the needs of selectors.

Selectors tend to be highly analytical group. They are professional buyers, and as such, don’t take kindly to being given the ‘hard sell’. They like to make their own decisions. These are five common mistakes made by representatives of asset management firms when dealing with fund selectors.

Big Mistakes

– Selling the numbers. The answer to the question, ‘Why should we buy your fund?’ is not ‘Because it’s had great performance.’ If that is the only reason a selector can identify for buying it, it’s likely the assets will quickly depart when performance hits a bump.

– Being clueless. ‘I joined the firm two weeks ago…’
This actually happened to me with someone from an established firm. He did not have any other information on his firm or products beyond what could be found on the website. The meeting was a waste of time and an embarrassment for all involved. It was my mistake for taking the meeting, but his boss’s mistake for sending him in alone.

– Underestimating the influence of the selector. Selectors are a closely knit group of people who are quick to share information. Informal observations of character go a long way. Talking down to a more junior analyst reflects poorly on the asset manager.

– Making things up. As an experienced selector, you can see ‘BS’ coming a long way off. Sometimes, asking a question of an asset manager to which they do not have a good answer leads to potentially embarrassing situations. Selector’s advice: if you don’t know the answer, say so and come back with a follow-up – don’t start shovelling.

– Not understanding and/or respecting the selection process. Though not expected to be practising experts, asset management representatives – from sales staff, through portfolio managers and senior-level executives – should at least be familiar with the basic logic of the selection process. Being asked to explain the most basic elements of the process during a meeting is really frustrating.