RFP: Diary of an institutional salesman, part 30

Will delves into the lies that fund managers and clients tell each other.

“What do you actually do all day?” my mother asked me, keen to find out more about the magical world of Far Eastern high finance. “Tell me in a way that I’ll understand, with my old addled brain.”

No man can lie to his mother, so I opted out, citing long-distance phone costs and the ever-useful classic get-out of an important client coming in on the other line. Does anyone even have an ‘other line’ anymore? Still, Mrs Fitzgerald bought it and, after the usual weather-related pleasantries, I hit the red button, safe from maternal affections for another week.

But it’s a good question, dear diary, and one which I ponder as I watch the rain battering the taxi’s windscreen. Today I have meetings with several institutional clients – those quarterly committee meetings where they invite two or three of their managers to explain performance and make some vapid remarks about The Market. We are told to stick to our allotted 12 minutes and then be promptly on our way.

For some reason, whenever we have one of these meetings coming up, the client’s portfolio always underperforms the benchmark. I mean every time – it’s uncanny. On our ‘non-reporting’ quarters, we shoot the lights out, or at least track the index. But this strange incarnation of Murphy’s Law has led me to one of my most useful creations, which I share with you here today: The WTF Excuse Sheet.

Clients want to hear what went wrong, yet still be comforted that it shouldn’t happen again. Pick any one of these reasons, folks, and you’re home and dry. Spin it out – that clock is ticking! – and you’ll also avoid any awkward questions.

We were early
This old faithful makes people feel good about their choice. Usually accompanied with, “We’ve never had quite so much value stored up in one portfolio; if we could buy more, we would.” Warning: don’t use this one for more than three quarters in a row.

Single security blow-up
Most people accept one or two mistakes, so narrowing it down to just one or two positions which went really badly wrong somehow seems better than being slightly wrong with all positions. Even better if you can imply some kind of fraud that “not even Buffett would have seen coming”.

Mean reversion from previous quarters
Great if you have had some decent performance in the lead-up to the disaster, this one is basically implying “Well, we made that money for you in the first place so you can’t be too upset when we lose it again.” Trust me, it works!

Sudden market rotation/volatility
Well, nobody could have predicted the earthquake, could they? And the tsunami?? And then the nuclear meltdown??? At this point, consider reaching deep into the bag of tricks and pulling out a cuddly black swan, just to make sure the point is delivered: it’s not our fault; shit happens.

Style out of favour
Look, you hired us to buy growth stocks and that’s what we’re doing. We were roughly in line with the growth index and, given the cashflow requirements last month, we’ve actually done a great job in the circumstances. Often, the client is so stunned by the audacity of this response, you can be in the elevator before they realise what you did.

Currency movements
Nobody really understands forex, so it’s as close as we have to a fail-safe excuse. “Well, as you know, the portfolio is/isn’t hedged, and your base currency really got killed/took off over this period, thus destroying the positive alpha we managed to create at stock level. Yes, we could take off/put on the hedge for next quarter, but who’s to say the movement won’t revert? Your choice, it’s your money…” (Do you see what happened there?)

Whatever you do, just don’t admit that the manager got it wrong again, that you know his neck is on the line and if you had your way he’d be taken off the account and flipping burgers in a Minnesota drive-thru.

Before I finish, dear diary, I don’t want you to think less of me for my frankness in sharing this. The clients are just as bad: they lie to us at every single meeting. I’ve been in this business long enough that even I have been on the wrong side of what’s known as a Manager Transition Event. And what rationale do the clients come up with to soften the blow of them sacking us? Their Excuse Sheet reads a bit like this:

They never come out and admit it, but after a couple of years’ lagging the benchmark, clients lose belief and exit at exactly the wrong moment. It’s the easiest thing to do, but punishes the wrong person. The portfolio manager doesn’t care, and it’s my bonus which suffers – where’s the fairness in that?

Change in asset allocation
You know who these guys are – AsianInvestor announces their fifth long-term asset allocation shift in just two years, and we get kicked into touch along the way. It’s truth-evasion of the highest order.

Change in consultant or consultant rankings
Maybe the client has a new consultant, or maybe their consultant has for some reason fallen out with Integrity, and we start to lose business hand over fist. This is happening right now, with the ongoing merger. Some suit in Chicago or Atlanta wants to be seen to be ruthless, and it’s my bonus that suffers.

Manager change
We sacked the underperforming guy, and replaced him with a new, better PM, and our reward? A card reading ‘Goodbye and Good Luck’.

The list goes on, I’m sure. None of these client excuses leave me any room for comeback, none I could have done anything about. I tell myself I have to take the rough with the smooth in this game, but the BS keeps flowing. One day we will be able to change all this, and just be honest. Until then, I’ll just have to keep telling my mother that it’s just like trading baseball cards.

William T. Fitzgerald is a fictional character, as are all the other individuals and companies in "RFP Diary". Any resemblance to the living or to real firms is purely coincidental. Will's adventures continue fortnightly.

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