Copylab fund commentary

To state the obvious, asset management firms have only one business imperative: cultivating assets under management (AUM). Through retention and sales efforts, the ways in which these firms communicate with clients are at the core of their business.

Yet oddly, the most regular form of communications asset managers direct to clients is often perceived as little more than a regulatory burden. Monthly and quarterly fund commentary, distributed to clients and posted onto websites, is rarely viewed as a marketing tool.

This is a glaring omission. As it happens, fund commentaries play an important role in both the client retention AND the sales processes. They may also be the one thing you’re getting wrong.

1. Poor fund commentaries can mean loss of inflows

For discretionary investors, the investment philosophy and process are pivotal. As asset management and distribution analytics firm Cerulli Associates says,

[Clients] want tenacity and transparency from fund managers, visibility even when times are tough, and high-calibre and very timely reporting of key data… they did not even rate fund performance very highly. Their number one selection criterion is investment philosophy, followed by transparency.”

When meeting with fund selectors, fund managers are quizzed on their “alpha edge”: the particular anomaly in the market they seek to exploit to derive excess returns. Clients want to understand the process through which fund managers seek suitable investment targets and are looking at the fund’s holdings to evidence the philosophy and process. Sophisticated investors understand that no strategy is a perpetual winner, and also want to be informed on the market conditions in which a given strategy is expected to outperform.

Yet even after a successful pitch, many discretionary investors will not rush to suggest a new fund to their investment committee. Instead, they express an interest in following the fund for some time, requesting to be sent – you’ve guessed it – regular fund commentary.

Consider the contrast: on the one hand, a fund’s pitching deck, which has been worked on for months, carefully tweaked and updated. On the other, the fund commentary reports, often perceived as little more than a time sink.

Explaining an investment philosophy to clients is about creating a narrative. When trying to drum up inflows, it makes perfect sense to carry that story into fund reporting. Mindful of this, a competent writer can embed a fund’s strategy into each of the commentary sections. Below is an example, using the following two equity income strategies:

Strategy A is a dividend aristocrats fund, investing in stocks that have increased dividends every year for at least 25 consecutive years. Notice this strategy will be heavily underweight the technology sector, because most successful tech companies don’t meet this criterion. For Strategy B, let’s pick a dividend growth fund, which invests in companies likely to grow their dividends. In our current environment, where tech companies are flush with cash, this fund is likely to be overweight the tech sector.

With this in mind, here’s what a sales-oriented ACTIVITY section of the commentaries could look like:

2. Poor fund commentaries can lead to outflows

Every strategy is bound to hit a patch of weak performance. And discretionary clients are happy to maintain faith in a product, so long as asset managers can demonstrate that they are sticking to a rigorous investment process, one likely to bear fruit when the market turns.

However, retaining clients through a stretch of underperformance is by no means guaranteed. In a fiercely competitive market, defending AUM within a lagging portfolio requires the provision of sustained support to clients.

One straightforward way to do this in commentary writing is by avoiding extreme language. This is because terms such as: “the fund significantly outpaced the benchmark” and “security selection detracted heavily from relative performance” may inadvertently lead clients to perceive a fund as being more volatile than it really is.

A subtler way to reassure investors is by referring to the strategy within the PERFORMANCE section. Returning to our earlier example, let’s say prices of tech stocks have been rising; assume Strategy A (Dividend Aristocrats), which is underweight tech, is suffering. Rather than duly reporting bad performance, the fund’s commentary could say:

At the very least, this text emanates confidence. Having read it, your client may also glance at their tech holdings and wonder whether smart money should be running elsewhere.

Writing commentaries this way is NEVER about misrepresenting a fund’s performance. If anything, it offers BETTER SERVICE to clients, because it provides more information on the fund manager’s thinking. This demonstrates a commitment not only to the process, but to the client’s right to remain informed.

Of course, big asset management firms commonly house dozens of strategies, most of which are either star funds (unlikely to be at risk of outflows) or are low on the sales team’s priority list. Commentary for those may not need to go into such detail every time.

But for strategies that benefit from an attractive story OR ones at particular risk of outflows, commentaries are a pivotal marketing tool. In such an aggressively competitive market, neglecting to ensure they communicate the right message can end up costing more than you bargained for.

Interested in learning more about tailored commentary writing? Drop us a line.

Vered Zimmerman

Vered Zimmerman

Vered is an investment writer in our London office. She holds an MBA from Cass Business School and an MSc in mathematics from the Hebrew University in Jerusalem.
Vered Zimmerman