Investors to Managers: Cut the Data and Tell Me the Story!

When it comes to fund performance reports, allocators want simple narratives that concisely tell them how their investments behaved in the previous quarter — not the data overload they’ve been getting from their asset managers, according to new research.

Even though there is more data available than ever before to illustrate the details of risk, performance attribution, benchmarks, stress tests, sector bets, and other insights, allocators think the added analysis often clouds a performance report’s value, according to research to be released later this week from Chestnut Advisory Group, which provides business development consulting services to asset managers. Chestnut interviewed 87 institutional investors and consultants for its most recent report, called “Delivering Investor-Pleasing Performance Reviews, in Good Times and Bad.”

“Allocators want thoughtful and candid explanations in a couple of sentences,” says Chestnut CEO and founder Amanda Tepper, who previously ran the senior portfolio management team at AllianceBernstein before starting Chestnut. “Vendors can provide endless amounts of data, but that doesn’t necessarily tell clients anything of value. And often it ends up being an exercise in checking the boxes.”

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Tepper cautions, however, that shortening their explanations of their funds’ performance doesn’t mean managers should spend less time to write them. Portfolio managers need to spend an hour or two every quarter to study data and figure out a fund’s story, she says.

“Investment teams often resist these exercises. There is still this sense that clients are asking stupid questions and every minute they take away from generating alpha is a complete waste of time,” Tepper says. “They’re wrong. The firms that do a good job get rewarded for it.”

Investors may want an easily digestible story, but they still require some data, however. About 80 percent of investors surveyed said the top three elements of a “superb” performance review are the portfolio’s current positioning, detailed performance attribution, and timely performance numbers.

Conversely, only 34 percent of investors needed a manager’s macroeconomic outlook in a review; only 44 percent thought a discussion of best and worst-performing positions was necessary; and only 58 percent needed to know about an investment’s compliance with specific requests. As one government plan sponsor told Chestnut in an interview, “We focus on hiring managers who can tell their story in an understandable way.”

When conducting research for the report, Tepper was surprised to find that many asset managers continue to get defensive when they underperform.

“Investors love people who say, yes, they made a mistake, but they’re owning it. I thought many more firms did that than actually do,” says Tepper, who made Institutional Investor’s All-America Research Team when she was a research analyst at J.P. Morgan Chase earlier in her career.

As an example, Tepper says investors don’t want to hear a value manager blame the fact that the style has been out of favor for why their fund is underperforming. Instead, a manager could say that he or she thought the market would turn around sooner than it has, and that they were wrong on that.

“You can say you still believe in the style or stock, but you have to admit something,” she says.

When it comes to best practices for performance reviews after a period of underperformance, Chestnut found that 74 percent of investors valued transparency and attribution. Forty four percent wanted more frequent discussions, and 27 percent wanted clarity on lessons learned.