Another survey has confirmed what has been the “new” conventional wisdom post-Madoff and post-financial crisis: institutions are weighing organizational stability more heavily in deciding their manager mandates than they are performance. We all know that past performance is not necessarily an indicator of future performance. Organizational instability, on the other hand, will most certainly lead to future under performance.
This latest study is entitled “Institutional Investor Brandscape” and was conducted by Cogent; 590 institutions were questioned for the survey.
A staggering 88% of respondents placed organizational stability at the top of their list as the most important criteria they use when selecting a manager. While I would have expected stability to top the list, I was surprised at the magnitude of this number.
Institutions have clearly become much more focused on the long-term – whether a manager can retain its people, whether its systems capabilities can match its growth and whether the future level of service and performance will be adequate.
Other answers that ranked highly in the survey in the decision process included strength of investment philosophy, investment team and risk management practices. While investment philosophy is important, respondents indicated that just as important if not more so is the process by which that philosophy is implemented. Institutions want to make sure that the philosophy is repeatable over a long period of time.
Respondents also consider consultant recommendations, a firms research and though leadership, fees and reputation. Interestingly, service and support models, relationship management and product innovation were at the bottom of the list.
This seems a little counter intuitive to me – after all, the relationship management and service teams are the ones that communicate and articulate what makes the firms stable in the first place, they the ones who update clients if and when changes take place, and they explain and how the firm is dealing with it. Perhaps respondents were making the assumption that good investment managers have good relationship management and service teams; to me, these are two distinct areas and firms might not necessarily excel in both.
So while I am confused by some of these results, I do think the survey clearly once again confirms that performance, while important, is certainly not the deciding factor for institutions when hiring investment managers.
The important implication for these results is that investment managers must be able to articulate their entire firm story during both good and bad performance periods. In fact, viewed from this perspective, these results should be somewhat comforting to managers – it means that if clients are comfortable with the organization and its stability they are less likely to fire them during the inevitable periods when they do under perform.
