Communication In A Crisis
If you're feeling fatigued from over-reading about COVID-19, you're not alone. Over the last 20 years or so, there have been a number of crises, but the current one is probably the biggest we have witnessed in our lifetime. If this is your first crisis, then congratulations. These situations tend to play out over a longer period of time than anticipated and I suspect this will be no different. There is typically the shock and the initial fall, followed by a bounce back, and then another fall as the underlying damage becomes apparent. The markets then start to assess value and reprice assets on a micro level, after which the markets recover.
It is interesting to note on an anecdotal level that communication from managers often becomes a lot more sparse during times of crisis. Managers might hide their portfolios during these times in fear of being exposed to a whole host of external reactions like anger, ridicule, shame, etc.
Fund managers lead very myopic lives and naturally judge themselves on performance. It is a very difficult task— as a fund manager, your job is to make money for your clients. When you have a good day, positive returns are often regarded as simply what you were mandated to do, while losses are often viewed as failure. Openly admitting these failures is naturally viewed with reticence. It can be hard to openly admit, especially when managers aren’t looking at their performance on a relative basis.
The fact of the matter is that most good allocators are similar to portfolio managers. They are not oblivious to the fact that managers will underperform in certain times and do well in others. The job of an allocator is to build a diversified portfolio that will optimise their returns per unit of risk, with a return objective over a certain time horizon. They expect their fund allocations to behave in a certain way and not deviate (because they have other allocations that should pick up the slack). If managers are not performing within expectations, then there are problems with the allocator’s portfolio construction.
When the communication from a manager goes silent, this starts to worry the allocator.
There are usually 2 ways to communicate during a crisis:
1. We were lucky: We were underexposed to this area of the crisis and so we have more opportunities.
This will give the allocator a decision on whether they want to invest with a manager that was either lucky or had really good underwriting or investment knowledge. They could either be in a stronger asset class, a good performer in a weak asset class, or whatever is relevant and relative.
2. We were unlucky: We had a lot of exposure in this area and this is how we are going to manage it.
Sometimes, even good managers get caught out. It is either because of pure bad luck or because of a poor decision. It can happen to the best managers, period. If it is poor risk management or because the manager was being too cavalier, then that is problematic. However, if the situation can be explained well in a very reasoned approach, then most allocators are forgiving.
Most managers market when times are good and allocators cynically know this. Managers rarely ever call when times are bad. If a manager with suffering performance calls and says, “Look, we are down 20% from the highs because we were a bit early on a trade. However, we are keeping this trade on and want to walk you through it,” most allocators I know would take that meeting.
For allocators, the problem with crises is that information tends to dry up at a time when they need it most. Trust and transparency often come before performance. Allocators should not take the top performer if trust is an issue.
Imagine an equity portfolio manager not able to value their positions. Imagine that same equity portfolio manager looking at investing in a company, but that company chooses not to report or disclose information for certain periods. And imagine if that portfolio manager was invested with the company, but they refused to explain their earnings. Most portfolio managers would exit or not invest in these businesses, and for very good reasons.
Most allocators are no different.
Because there is a lack of information from a certain subset of managers, commentary becomes highly prized and new relationships are made.
Allocators tend to use these crises to learn from their choices. They want to see how their portfolios held up to the stress. Most allocations cannot be undone very quickly, so redemptions only happen once the damage is done. Depending on how the portfolio is set up, the allocator may be in a position to take advantage of the current environment, especially with managers feeding them with good information.
Oftentimes, the best fund managers are good business managers. Good business managers tend to be transparent with their staff and customers about their performance. However, great business managers explain both the good and the bad and what they are doing to remedy the situation.
During times of crisis, I find the best managers are those reporting information when it is relevant and taking a proactive stance; it shouldn’t be daily, but when new information comes out. Any credible information is great and it doesn’t have to be from funds that you are already allocated to. It is a great way to bring allocators into the narrative. If you can become a trusted source now, they will have a lot more confidence in your strategy when the next crisis comes and they know you will be there, through thick and thin.
Ole Rollag is Founder and CEO of Murano
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