(1888PressRelease)
June 04, 2006 - In the ‘80s, when small, intrepid bands of portfolio managers first started venturing out from the safety of large insurance companies and banks to start managing money on their own, raw, naked performance was what counted.
In the ‘90s when the ranks of registered investment firms surpassed the number listed stocks on the AMEX, marketing and distribution were the keys to success.
Today, one of the major keys to success in the investment management business is risk management. It is said that Eskimos have 26 different terms for snow. Today, Wall Street has as many ways of describing risk. Here are just a few:
Headline Risk: Will my board read something bad about my manager in the paper?
Tracking Error Risk: How far away from the benchmark can I expect this manager to be?
Talent Risk: What’s the probability that a firm can retain good talent?
Business Risk: Will the investment manager be around next year?
Enterprise Risk: Will my company be around next year?
Concentration Risk: Do I have too much money with this manager or in a given strategy?
Funding Risk: What’s the probability that my DB plan can’t pay my retirees?
Consultants and plan sponsors are far more interested in these questions than they are in performance or style. Why? Well, after two decades of comparing and studying performance and style, the tools for analyzing these two aspects of investment management are very well developed. Investors are comfortable that performance numbers that claim AIMR/GIPS compliance are likely to be accurate.
Holdings based and return based analytical tools can reveal whether a manager is really a large cap value manager or a large cap core manager. Investors can measure performance and style against a variety of benchmarks using a variety of online tools or with their consultant.
Traditional institutional asset management firms submit performance and holdings data to as many as 40 different databases without thinking twice these days. That wasn’t the case 20 years ago. Then, it wasn’t unusual to find a few portfolio managers who refused to disclose assets under management, holdings and monthly performance because it was too much of a nuisance that didn’t reveal the more important aspects of product and philosophy. Those days are long gone.
Today, we see portfolio managers who still are reluctant to disclose certain types of information. Large, bank or insurance affiliated organizations are reluctant to release compensation or employment contract information because the think it threatens the compensation structure of the larger firm. Hedge funds are fighting transparency – disclosing holdings or portfolio profiles – because they think the edge they are exploiting will be arbitraged away by competitors copying their styles.
Both perspectives have merits…but they have to be weighed against the realities that face today’s investors. That means understanding the buyer’s concerns about risk.
The first three risks described above are directly related to investment managers.
Headline Risk
For hedge fund managers, headline risk is mitigated – in the plan sponsor’s mind – by transparency. While the most sophisticated hedge fund of fund will confess that transparency provides little in the way of being able to insulate an investor from improprieties, it does address one important buying criteria of plan sponsors: comfort. Hedge fund of funds serve two excellent purposes. First, they allow smaller institutional investors diversified access to this asset class. Second, they are a ready market for individual hedge funds to gain distribution. The price of that distribution channel is transparency, showing what is held, how it’s priced, when it’s traded and the profile of the fund.
Tracking Error Risk
If you want to play in the institutional arena, performance and holdings is a must. If you are pursuing high net worth clients, this information may be optional…for now. With the increasing availability of online risk management tools, the day is coming when most investors will be able to tell you the exact tracking error risk in their portfolios in much the same way they can tell you their daily results.
Talent Risk
Institutional investors are particularly leery of personnel turnover. This being a free country and all, there is no guarantee that the manager or team responsible for generating the performance that got a firm hired will remain on staff.
In order to get some comfort with regard to this type of risk, investors now ask the tough questions; “Why will this team stay?” “Describe your compensation packages.”, “Tell us about the ownership structure?”, “What is your succession plan?”
ASAPAS.com recommends putting yourself in the client’s shoes for a moment. If you’ve ever had to change accountants or attorneys, you know that personnel turnover is no picnic. In addition, it’s expensive to swap out one manager for another when you consider the cost of a search and transition commission expense.
Bottom line, full disclosure is in. It’s the latest in screening techniques. If investors or their consultant sense that they might be dealing with unexpected surprises during the course of a relationship, they will move on the next candidate…quickly.
Lauren Cola, president and founder of ASAPAS.com, is dedicated to the idea that responding to requests for information should not be a burden. Nor should data collection and other administrative tasks take sales and marketing professionals away from their core business of attracting and retaining clients. After manually completing thousands of requests for information and building proprietary marketing tools, Lauren was determined to build a better way to deal with this paper-intensive process. The acceptance of the Internet as a reliable and powerful communication tool provided the logical distribution platform for an online investment marketing services company.
With over 20 years of progressive line, management and consulting experience, Lauren's background encompasses investment management marketing and technical product management. Prior to founding A.S.A.P. Advisor Services, Inc., Lauren worked for Citibank Asset Management, Bankers Trust Company, Chase Asset Management, HSBC Asset Management, and Empire Blue Cross Blue Shield.
For more details, please visit http://www.asapas.com
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