I read updates from many fund managers and I have noticed over the past year or two that a number of them such as Peters MacGregor, PM Capital, and a grab-bag of others are making a big push to seemingly attract more retail FUM. Look at the PM Capital website:
And then compare it to stock advisory sites Intelligent Investor and The Motley Fool:
For that matter, look at Barefoot Investor: https://barefootinvestor.com/blog/
PM Capital sells different products (managed funds) compared to Intelligent Investor/Fool/Barefoot (subscription services), but they are clearly targeting the same niche demand – bite sized news pieces from an authority figure telling you stuff about the market.
If you’re a fund manager, retail FUM is an obvious goal for you. Some argue it’s not worth the effort, but if you train it right, retail FUM is more loyal and sticks around longer. Plus if there’s one thing that’s clear in today’s market, it’s that there’s a helluva lot of retail money looking for a home. I guess that explains all the LICs out there looking to lock up some permanent capital.
So a Fund Manager Extraordinaire might decide to piggyback on the appeal of popular retail investment sites (Intelligent/Barefoot/Motley etc) and use this as a device to drive traffic and, hopefully, build their rep and engagement with their funds. The problem is that many fund managers are boring as fark. Listen to this:
- We are long term investors
- We seek attractive risk-adjusted returns
- We value capital preservation
- We invest in what we can understand
- We aim to beat XYZ index over X years
Every fund manager ever said some combination of this and it’s a) boring, b) undifferentiated, c) sometimes a lie.
Also d) household investors don’t understand what fund managers actually do. Paraphrasing Dunning and Kruger, they don’t know what they don’t know, which makes it really hard for you – Fund Manager Extraordinaire – to explain how your services actually add value.
Consider these two samples taken from Barefoot Investor and PM Capital:
Barefoot: “Yet there is a cheap, simple no-brainer way to ride the coming revolution: just buy a low-cost, tax-efficient index fund that tracks the 500 largest companies in America — ”
Good advice, easy to follow, it’s a revolution (!!!), and an investor will do well out of it over the long term.
PM Capital: “What may be affected by broader cannabis use? What other industries? For example, might property trusts who hold pubs be affected by the decreasing relevance and power of having a government license to sell less desired (liquid) social drugs? These are the types of things worthy of consideration as active investors.”
Hey man, I just want stocks that are gonna go up. Or that Bitcoin thing, I hear that’s good too.
In my opinion, if you are trying to learn to invest well, PM Capital’s writings are very valuable. However, many fund managers can be disengaging to household investors. The types of pieces that often appear online are written by fund managers writing about the stuff that they do or think (in their role as an investment professional) every day. While their thoughts are valuable, they are out of reach of the retail investors they may be trying to attract. The vast majority of retail investors do not grasp things like risk-adjusted returns, industry consolidation (what this actually means in terms of pricing power, ROIC, etc), the business cycle, and so on.
This is unfortunate because it means your valuable thoughts – fund manager extraordinaire! – are nearly valueless because the people you are pitching to are not equipped to grasp what you’re talking about.
Imagine if you showed up in 8th century Egypt and started explaining bacteria. Right? Great advice, but incomprehensible to the locals.
Now PM Capital may not be trying to attract retail FUM, I’ve just used them as an example. However, if you are a fund manager trying to grow your retail FUM, consider this:
At first glance there appears to be a tradeoff between the hype-y business models of some investor services and ‘respect’, for want of a better word. Few fund managers want to trade their reputation and dignity by writing things like ‘3 ways that Amazon will destroy Australian retail’ with a link describing a ‘revolution’ at the end of it, even if it might attract FUM. You can either sell hype or you can be a professional money manager, right? Wrong.
I propose instead that there are different forces at work. Retail investors don’t necessarily like hype either, if for no other reason than it reminds them of sleazy salesmen and/or times they were rooked out of cash by shysters in the stock market. Instead I think ‘hype’ is a proxy for other factors:
- Engagement – people want someone who is approachable and who explains things to them. Retail investors don’t know what they don’t know, so they look for (authoritative, believeable) people that will tell them new stuff and explain to them how it works.
- Conviction – this is absolutely vital. People don’t understand that investing is a portfolio and probability game. As a result, many investors think that you have to go out and ‘do’ investing – they want to see you swing at the pitches with some conviction, even though as a manager this may not be what you are about.
- Stories – again, investors don’t understand the more probabilistic features of investing. Most people make sense of the world through stories, and retail investors especially. Fund managers often write about more technical or practical considerations in general terms, and can sound awfully dry.
- Personality – professional investors seem to often subordinate their personality, opinions, and beliefs to their work. Perhaps this is a function of pitching to institutional clients. However, it is not a winner for retail. If you are the ‘risk adjusted returns’ fund manager I described in the 5 bullet points in the intro, how can you differentiate yourself from other fund managers saying the exact same thing? Your investment approach is probably not unique, especially not within the ASX300. Your net % performance numbers and fees (the only thing that retail investors look at) are probably pretty comparable to peers. Your personality and experience may be your best asset when it comes to differentiation.
Although fund managers can appear a bit cookie-cutter, most have quite differentiated backgrounds in my experience – and even if they don’t, their experiences are definitely differentiated compared to the retail investors they’re trying to attract (nurses, lawyers, electricians, whatever).
To put this another way, fund managers often seem to be primarily selling their professional mindset. I would agree that this is a manager’s most valuable attribute. However, this is definitely not what the retail investor is trying to buy. There is a clear opportunity to turn experience and knowledge into a point of engagement and difference.
And you know, let’s take a really topical story at the moment – Retail Food Group. Totus Capital played the AFR like a fiddle on this (they were short) and they made monster returns. Kudos. But look at what they said:
“The company is relying on external capital to survive, and having stories like this out there will either make new franchisees or bankers think hard about signing up or lending them more money,”
What does that even mean from a retail investor perspective? What’s external capital? How does it work? Why is this a negative? Why are no new franchisees a bad thing, they still make plenty of money from existing ones, right?
I’m not familiar with RFG myself but I gather the implication is that RFG would go under without regular injections of cash from franchise sales. That is, new franchise sales = big one-off cash injections to RFG, which the company (presumably?) needs to survive. I’m just guessing, but if that’s true, Totus should have said that instead. I thought there was a huge opportunity for a story to be told here about the RFG business’ deterioration from the short perspective, in a way that was relatable to the market.
If the Sydney Morning Herald hadn’t published their Cup of Sorrow about RFG, Totus could still be swinging in the breeze waiting for their short to work. SMH showed viscerally that the right story could have brought it undone a lot quicker.
Totus doesn’t market to retail FUM as far as I know (they have a sophisticated audience), and they’re long-short while most funds are long-only, but my point is the same. A long-only fund manager could have told that story and built their rep the exact same way. I keep pointing to Forager’s Dick Smith is the Greatest Private Equity Heist of All Time blog post, and it should be required reading at FUMGatherer School. Forager has never had anything to do with Dick Smith whatsoever, and yet that post paid for itself a thousand times over.
Another consideration is the importance of stories to re-rating a company. Many long and short investments depend on a market re-rating, and stories are the perfect way to rewrite the market’s thoughts on a business. A good story is insidious in a way that “this stock is a good/bad investment” is not.
There is a market for tying stories and analysis together, and in my opinion, the pitches of most fund managers chasing retail FUM are missing the mark by a large margin.
By coincidence, I ran into this piece today about The Greatest Story Ever Told that sums this up nicely (click the picture and read the PDF).
How do you sell a managed fund?
What sort of transaction is taking place between a retail investor and a fund manager? Simplistically, the retail investor wants to make money and find someone to trust – but they don’t fully grasp the industry and all of the possible things to consider. The fund manager wants to do their job, and being experienced and generally of the belief that they are a good person, they assume that the investor’s money is in good hands and may not think any further than that.
There’s a real gap there that’s gotta be bridged. If you’re a fund manager, how do you grab the investor and pull them along until you’re both on the same page? Revisit the criteria I listed above:
Engagement – How do investors get access to your thoughts and expertise, doubts and all?
Conviction – What do you genuinely believe (in specific terms, related to X or Y investment) and why? What have you been right about (and wrong about!) in the past? There is a noted tendency for some fund managers to talk only in generalist terms rather than get down to brass tacks.
Stories – Can you tell me a story that shows me how you see the world, and lets me judge you for myself? What experiences have you had that demonstrate why I should consider trusting you with my money and what would make me stick with you in a downturn? Here especially is an opportunity to talk about your losers, mistakes, or things that you called right but missed out on because the uncertainty was too high. Some managers fear that investors will leave them if they admit to mistakes. They may – but equally, if you write well and convince people of the merits of your point of view, you will actually bind investors closer to you because they will start to understand your point of view and start to think more like you do. This has a lot of implied benefits for the loyalty of your FUM.
Personality – Who are you? What do you think and what do you believe, in specific terms, about X or Y social/market phenomenon? To be sure, attracting investors is emphatically not about you as a person. You don’t want to be boorishly self-centred. But if a retail investor is investing with you, they definitely are interested in knowing about your personality as an investor.
Historically, gatekeepers (advisors etc) have made it hard for retail investors to get any real access to or engagement with their manager. Which is a crying shame, but things haven’t changed all that much, so there is a significant opportunity for a fund manager that stands out to differentiate themselves from their peers.
Sure, a writing capability could be difficult, expensive, or painful to develop – but Livewire is hardly free, and I’d love to know what kind of ROI a fund manager actually gets from posting on there. That’s not to knock Livewire, which is a great resource – but the fact that it’s so in demand from fund managers vividly demonstrates that there is a gap in the market and unmet demand for a manager’s stories and experience.
Unfortunately, despite the advent of Livewire, I find that many of the funds that post on there just aren’t that engaging. They all read the same books and they mostly all share a similar approach to investing (see the first 5 bullet points in this post). Many funds appear to struggle to differentiate themselves from the crowd.
That’s why I think fund managers are missing a huge opportunity to stand out by tying together stories and analysis in a way that can be understood and enjoyed by the public.
I thought long and hard before publishing this post. It may sound as though I am critical of fund managers, but that is not the intention. Fund managers are doing what I lack the skill and ability to do myself – it is not for me to criticise the man in the arena. I hope that this post will be received in the spirit that it was intended – an attempt to add something useful to the discussion.
I used PM Capital and Totus Capital in my examples here solely as a vehicle to move my story along. I wouldn’t like my thoughts to be interpreted as criticism of either the manager or the business. There were plenty of possible examples to choose from, but I settled on PM and Totus because they have been around long enough – and their performance is good enough – that they have nothing to fear from an anonymous blogger.
I have no financial interest in any of the companies mentioned above. I have no professional or financial relationship with any of the funds or fund managers mentioned above. I am not invested in any of these funds. This is a disclosure and not a recommendation.