Performance remains a critical selection factor for investors; but increasingly in a post-Madoff world, it’s not what’s most important to them.
Although investment firms understand this, many choose to ignore the qualitative factors that have significant influence on investor decision-making, which include:
- What You Stand For: INTELLECTUAL CAPITAL is what motivates investors to place their capital at risk. This does not involve how much you know. Investors need to understand what you believe in, and to appreciate what you’re attempting to achieve.
What does “intellectual capital” sound like?
Here’s a letter to investors from Phil Goldstein of Bulldog Investors, regarding one of his funds: “As these statistics suggest, we are risk averse. Thus, we tend to outperform in down or choppy markets. On the other hand, we expect to underperform the stock market when it booms…For the most part, we eschew any attempt to predict the markets. Instead, we focus on trying to find investments where we think we have an edge. By seeking out and exploiting inefficiencies in the marketplace, we hope to generate above average returns for our Fund with reduced risk. We also will use activism when necessary to try to unlock the value of our investments. This strategy has worked quite well for us in the past and we see no reason to alter it.”
- Who You Are: PERSONAL INTEGRITY qualifies you for consideration by investors. Lacking confidence in your character and reputation, both as a firm and individuals, they will dismiss your performance and your ideas.
What does “personal integrity” sound like?
Here’s what Ray Dalio of Bridgewater Associates stated in an interview, “I started Bridgewater from scratch, and now it’s a uniquely successful company and I am on the Forbes 400 list. But these results were never my goals—they were just residual outcomes—so my getting them can’t be indications of my success. And, quite frankly, I never found them very rewarding. What I wanted was to have an interesting, diverse life filled with lots of learning—and especially meaningful work and meaningful relationships. I feel that I have gotten these in abundance and I am happy.”
- What Others Think of You: CREDIBILITY must be validated by respected third parties, to provide investors with the confidence they require to consider you as their financial fiduciary.
What does “credibility” look like?
Media exposure in objective, respected publications is one of many ways to achieve third-party endorsements. Here’s the head, subhead and opening of a recent Barrons’ profile: A Top African Hedge Fund Is Buying Markets Others Are Deserting: Andrew Lapping, who runs the Allan Gray Africa Equity fund, has been moving into markets like Zimbabwe and Nigeria that others are deserting. “Investing successfully in Africa’s volatile and illiquid stock markets requires as much patience as courage. Andrew Lapping has acquired a bit of both as the South Africa–based portfolio manager of the Allan Gray Africa Equity fund…”
Investment firms with the talent and discipline required to generate consistent risk-adjusted returns are entitled to investor interest on that basis.
But firms that focus exclusively on their performance to attract and maintain assets — without addressing the selection factors that build understanding, trust and loyalty among investors and their advisors — demonstrate a reckless approach to enterprise brand risk management that not only compromises their financial acumen, but should provide current and prospective investors with some cause for concern.
How an investment firm manages its enterprise brand alpha should be part of the due diligence process for investors.