Tuesday, June 20, 2006

How can you report underperformance in your client letters?

Are you dreading the composition of your quarterly client letter because you've got to report underperformance?

Check out the suggestions below, which I compiled with the help of the 50+ participants in my Boston Security Analysts Society presentation on "The Six Deadly Sins of Investment Commentary."

  1. Explain why you underperformed -- For example, one stock blew up or a sector was out of favor
  2. Give the context for your underperformance -- For example, your style was out of favor, but you expect it to recover in the next quarter. Or perhaps you've underperformed in the short-term but your long-term performance more than compensates for that.
  3. Accept responsibility for underperformance -- BSAS participants were divided over whether to apologize for underperformance. Some feel that an apology is refreshing and disarming. Others prefer to put a positive spin on underperformance. For some, it depends on whether underperformance is a short- or long-term phenomenon.
  4. Be proactive about improving performance, if it's something within your control
  5. Emphasize the consistency and quality of your investment process
  6. Discuss performance vs. client expectations -- Perhaps you need to help your clients develop more realistic expectations
  7. Don't overpromise -- Remember your compliance professional loathes guarantees that you'll make up for underperformance

Do you have comments, suggestions or questions? Please use the comments section below to share them.

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