Managing client money and the importance of communication

In our experience as investment managers, a fundamental shortcoming we often see is poor ongoing communication between managers and investors.

Investors (and their advisers) are the life blood of investment managers everywhere. Given the importance of this symbiotic relationship, keeping investors fully informed at all times should be the cornerstone of all investment managers. In many cases, the communication relationship focusses on distribution, that is getting the capital in the first place, but strong communication needs to extend beyond this across the entire investment lifecycle.

Over the years, we have been complimented for our open and honest communication. It is policy to tell it how it is – good, bad and indifferent. It is what we would expect as investors. However the investment management sector can at times forget it is not actually their money. Investment managers are only stewards or custodians of client’s wealth. At the end of the day, it is always the investors’ money. Our role as investment managers is to provide a fair risk adjusted return on a clients invested capital.

There can at times be conflict between what is best for the investment manager’s business and what is best for building investor’s wealth. We are starting to approach a point in the investment cycle where investments can be highly value accretive to an investment manager, but only marginally accretive to investors (especially when adjusting for risk). This also occurred back in 2007 and 2008. At such a point in the cycle, raising capital can be quite easy. The real issue is whether you can allocate it wisely. Unfortunately, only time yields this answer and as Warren Buffet so eloquently said “only when the tide goes out do you see who has been swimming naked”.

Everyone is in business to make a profit but when you are in investment management, there can be a fine line between what is best for the business and what is best for investors. Our guiding light has always been “What decision would we make if we were the investor”?

This brings us back to the communication point. Communication with investors should be based upon a simple standard – what would you want to know if you were the investor? Clearly you don’t want to be informed of all the day to day management, but you expect to hear about matters which go substantially to risk and value (both positive and negative).

Further to this point, it is imperative that investment managers take communication cues from clients. If investors are asking questions it is because they seek information or answers. By way of example approximately 2 years ago ago we had a number of investors nervous about an investment position we had on their behalf. Responding to the cues, we called an EGM to vote on either selling out of the position or continuing on with the investment strategy. As manager, we put substantial future earnings at risk. Investors could have voted to realise the asset and we would walk away with nothing. However after providing detailed information, and giving investor’s full control over their capital, they voted to retain the investment.

The feedback we received from our investors was unbelievably positive. They valued the open and honest communication and the fact we deferred to their best interests. Whilst we risked the possibility that we could have lost our mandate, by taking this approach and placing the investment decision making back in the hands of investors at a key stage of the investment, it probably generated significant goodwill for our business. With the value of hindsight, our investors made the right decision as the investment is performing very well. We certainly made the right decision calling the EGM.

Investment management at its heart should be a simple concept. Act as if the money was your own and communicate the messages you would expect if you were the investor. Business might grow a little more slowly than if you only took a strict business focus, but longer term everyone will be far better off.