As a financial marketer, you might one day find yourself in the tricky position of having to market an underperforming fund. Your first instinct might be to gloss over the performance issue and focus on the other things the fund has going for it, such as an experienced management team. But you will probably find you are rewarded with stickier investors if you tackle the issue head on. This means being open, honest and transparent.

There are many reasons why a fund may go through a period of underperformance. Perhaps a new manager has taken over and is turning over positions in the portfolio, maybe the investment style used on the fund has fallen out of favour, or maybe a few bad stock selection decisions have hit returns. Even something like a surprise rise in interest rates can play havoc with an unprepared fixed income fund.

Most investors realise that markets are cyclical and not every investment style will work in every environment. They know that unforeseen situations can hit companies and send their share prices into a tailspin, which can have a knock‐on effect on those funds with significant exposure to the stock. Professional investors with a lot of experience in financial markets will understand this more than most.

If a wealth manager or adviser invests client money in a fund, it will usually be because they have done careful research into it, met with the manager, and understand and believe in the investment process and philosophy. They will have bought the fund with the intention that it will serve a particular purpose within a diversified portfolio – perhaps relative capital protection in down markets rather than shoot‐the‐lights‐out alpha generation, in which case they would expect underperformance in rising markets. A period of poor performance should not shake the case for holding the fund, as long as the reasons for it are clearly explained and there has been no fundamental change to the underlying process.

Defining Underperformance

KallCap Solutions co‐founder François Zagamé says fund selectors like himself are often asked how they deal with underperforming managers, but there is no simple answer as every case is different he said;

We first need to establish if the manager is actually underperforming: is he or she lagging the main index or peer group? This is irrelevant if part of a style diversified portfolio. If they are lagging their style benchmark or our opportunity cost, then more work is needed. If the underperformance is not due to a certain style of bias then it is important to understand if it’s a blip or a trend and assess how the manager is dealing with it. If a blip, we must be reassured that he or she has learned from their mistakes, and will come back stronger. If a trend, we must understand if they will adapt or drown.

Zagamé says he would always interview a fund manager before making the decision to sell a fund.

I have never sold an underperforming manager without talking to them first, unless there is a good reason to sell such as that they have been dishonest. I would always give someone a chance to explain why they have messed up and how they are going to fix it.

Opportunity or Problem? Informing your clients is key

The role of the marketer is vital in helping investors to see a downturn in performance as an opportunity rather than a problem. You can get ahead of any redemptions by making sure you detail exactly what is happening and why and, more importantly, when and how the fund is expected to get back on track. The manager should be visible and confident in explaining the causes of underperformance and what he or she is doing about it. Written comment pieces and digital assets such as video or infographics which use data to explain what’s happening with the fund can be used to great effect.

Webinars, conference calls, Q&As and roadshows which gets the manager out there and talking to investors can encourage them to stick with the fund. Giving investors the chance to ask questions is crucial to maintaining confidence. You could create specific content focusing specifically on the recent performance issues, set against the backdrop of what’s been happening in the wider market or in the economic or business cycle.

Honesty is the best policy and, if you handle a period of underperformance the right way, you could even build a stronger, more trusting relationship with your investor base and secure more patient capital in the future.

Have questions or want more tips on how to market an underperforming fund? We’d be happy to chat.