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TRUST: THE PRIMARY DRIVER OF ALLOCATIONS.
As a matter of professional practice, I am always consistently engaging individuals, family offices, allocators, consultants and institutions to get insight and feedback about EVERYTHING that impacts allocation and investment decisions. A main point continually emphasized in almost every conversation: They all were seeking partnerships with asset managers that embody the attributes of being “a firm with individuals that could be TRUSTED“.
The firms that established themselves as trustworthy, highly skilled and insightful pre-COVID were the firms generally most successful raising and retaining assets. Those firms were in large measure the first “go to source” for perspective and guidance in the unprecedented situations were are currently experiencing.
To say TRUST is the primary allocation driver is a statement grounded in research not anecdotes or intuition. In fact, Chestnut Advisory Group, a CT-based firm that provides business development consulting and research to asset managers, revealed in an excerpt (see below) that INVESTOR TRUST is the culmination of the top 5 factors why an asset manager is really hired.
When an individual, family office, allocator or institution invests in a manager or fund, it is an act of TRUST. They are essentially exposing themselves to actions, which could, if they go wrong, do significant reputational, emotional and/or financial harm. Some investors may extend trust quickly without a lot of justification simply due to some highly-desired or valued qualitative traits (educational background, pedigree, personality) while others may focus on quantitative metrics (absolute returns, risk-adjusted performance, etc). However, after the 2008 mortgage debacle, an extended period of under-performance by hedge funds as a group, the Madoff incident and now the virus crisis, TRUST has been BROKEN. The result is a pervasive climate of hyper-skepticism and cynicism about active management and hedge funds specifically. Simply, TRUST is now harder to earn, which makes raising assets much more difficult with considerably longer time now required to reach even the minimum threshold AUM in many instances.
With that said, part of the professional responsibility of the alternative industry on an individual and collective basis is to restore TRUST. Every manager/fund, big or small, along with service providers must now win back investor trust by earning it through action, attitudes, philosophy and behavior. The propaganda, empty promises and poor performance must be replaced with proof.
Despite the transactional nature of investing and all the emphasis on quantitative metrics, at the end of the day this is a people business driven by TRUSTED relationships! The personal, social and business limitations now in place due to COVID-19 now make interpersonal connections a valuable commodity. This means that managers/funds that are exceptional at building and maintaining TRUST, will have an important strategic advantage in the acquisition, retention and stability of assets under management.
The ability to establish, maintain and augment trust-based relationships with current and prospective investors must therefore be a central focus of the marketing process. What we have seen in the investment management industry in last 10+ yrs is the result of the absence of TRUST. Without trust, investment management has devolved into a price-driven, commodity ripe with miscommunication, disappointment and worse issues.
TRUST is key in the survival, viability, sustainability and vitality of the industry.
IT’S ALL ABOUT TRUST.
Remember: We are all in this together and will come through it TOGETHER!
Until next week: Be safe, stay calm and execute!
As always, continued success.
Bryan Johnson, Managing Partner
Direct: 512-786-1569 or firstname.lastname@example.org