Competition in Asset Management: Good Ideas vs. Good Marketing

You need money to make money, right? The same 10% return looks and feels very different for a one million dollar investment vs. a one billion dollar investment. Not surprisingly, the competition in the asset management industry for investors’ assets is fierce – there is a lot at stake. How does one convince a potential client to invest in your investment vehicle? Keep in mind that the investment would be made on an implicit promise of future performance, which, by the way, will only materialize after the investment decision is made. Even then, it may require several years of data to truly assess its performance. How do you convince a wary client that the future is bright and that his/her money will be well taken care of? Are you truly sure that the performance of your strategy a few years down the road will meet the needs of the client? Most importantly, how do you differentiate your investment vehicle from others who could be making outlandish claims about their funds’ expected future performance?

Track records

A good track record is a trump card for any portfolio manager. It is very impressive to show off a chart with a squiggly line beating the S&P 500 index or, even better, your competitors’ performance. In fact, many naïve investors do fall for a good track record! Unfortunately, a good track record does not equal a good investment. In fact, a great past performance may not be indicative of future performance at all! For example, flipping a coin has a legitimate chance of producing a great track record (yes, it is statistically possible to get lucky a number of times in a row)… However, nobody would invest in such a track record if the strategy that generated it (i.e., flipping a coin) is made public. The more sophisticated the investors, the more they understand the fact that past performance could be a poor indicator of future performance. Even more telling, a recent report by State Street found that only 42% of investment professionals themselves believe that skill is the primary driver of outperformance! So how does an investment manager convince potential clients that his/her performance is not driven by luck?

Battle of ideas

It is critical to convince investors that you have great investment ideas and a fundamentally solid investment strategy that drives the results. And that could be tricky without giving away the key details of your strategy to your potential competitors, or even to savvy clients themselves. As Michael Burry of Scion Capital hedge fund put it:

If I describe it enough it sounds compelling, and people think they can do it for themselves … If I don’t describe it enough, it sounds scary and binary and I can’t raise the capital.

Yep, even if you have a great idea, you can’t fully disclose it to convince potential clients – now, that’s a Catch-22!

Unfortunately, having a good investment strategy and successfully communicating that you have a good investment strategy could be very different tasks…

Battle of marketing

Ultimately, investors invest with you if they are convinced that your strategy will deliver in the future. And convincing is the realm of marketing…

The true battle for investors’ assets is the battle of marketing.

Here I don’t mean “marketing” in a bad way (like lying about investment strategies or track records – think Bernie Madoff), as truly great marketing lies in convincingly communicating just enough of your investment strategy without completely giving away “the secret sauce”. For example, Cliff Asness mentioned in his 2014 speech at the FMA conference that AQR did better than most firms in retaining its asset base during economic downturns not because they were the best investment managers, but because they did better than most in communicating with their clients.

So how do investment managers market themselves to potential clients? Just as there are many different types of investors and investment vehicles, effective marketing takes many different forms…

Most actively managed mutual funds tout their track records and Morningstar ratings – a completely logical approach given that the majority of investors in mutual funds are not that financially sophisticated, and can be easily impressed with good past performance.

As potential investors get more sophisticated, as in the case of hedge funds, they recognize that a good track record can be fleeting, and they need to be convinced that you do, in fact, have great ideas and a sound investment strategy. Since it is impossible to completely spill the beans on any truly unique active investment strategy, many hedge funds and other active investment management companies got pretty adept in indirect marketing, showcasing “the goods” without talking about the details of what exactly they are doing. For example, Bridgewater research and white papers, Cliff’s perspective, investment outlook by Bill Gross, plus any mentions/interviews in the press reinforce the message that these investment managers are super clever by giving away really smart investment ideas (one can only imagine how awesome are the ideas they don’t share). SkyBridge’s extravagant SALT conference is perhaps the best example of conspicuous hedge fund marketing that I know of… SkyBridge really upped the ante in the battle of marketing among hedge funds. No wonder that a few biggest and most “prominent” (ahem, heavily marketed) hedge funds attract the lion’s share of cash inflows. According to a recent survey by Deutsche Bank, assets managed by hedge fund firms with more than USD 5 billion AUM have grown 141%, compared to 53% for firms with less than USD 5 billion, and today less than 200 firms account for more than two thirds of industry assets.

Still, there is this uneasy feeling in every investor’s heart that it could be just good marketing, and making an investment means that you would end up paying handsome active management fees for run-of-the-mill investment strategies that don’t perform exceptionally well. Indeed, having a good investment strategy and faking a good strategy may look exactly the same from an investor’s perspective. As pointed above, some key parts of any novel investment strategy must be shrouded in secrecy. How can we know for sure if a fund manager does indeed have a great investment idea or just pretends to have one?

It is quite possible that the growing popularity of passive investing, reflected in the growth of index funds and ETFs, is a result of a truly convincing and transparent marketing strategy on their part. All these funds have to do is spell out exactly which index they track and what their fees are!

However, despite the simplicity, the problem of attracting investors remains. One must still convince potential investors that tracking a particular index is a sound investment strategy. Remember, it took John Bogle quite some time to convince investors that passively tracking the S&P 500 index is a great investment strategy. Nowadays, tracking the S&P 500 is the most ubiquitous investment strategy! Judging by the explosive growth in even more sophisticated ETFs and other indexed products, index marketing is working! Or, maybe it is just that investors have become more educated and truly appreciate transparent and well-articulated investment options… Perhaps, helping investors become educated about finance is the best marketing trick of all!