We are a small-cap, U.S. growth stock manager and while we provide performance results to clients, prospects and consultants in the usual way, when we get into meetings we don't really explain our performance in ways that effectively capture our unique skills. In what ways can we demonstrate our true added value?
Show them your alpha
Asset owners are always looking for investment managers who can generate returns that are consistent with a specific strategy and style and are hopefully better than what they could get if they passively managed a similar portfolio. Therefore, you must show them.
When you say “we provide performance results … in the usual way,” I will assume that you typically show your gross total rate of returns over multiple time periods and depending on how many years you have been executing your current investment strategy, you most likely show from inception to date, each individual year, then multiple time periods like the last three, five and perhaps 10 years. I would suggest you also look at your returns over market cycles such as “up markets and down markets” and full market cycles.
I also assume you compare your performance to benchmarks that are typically agreed to in advance with your client. Because you are a “traditional” active U.S. equity manager, you also should compare your returns to relevant universes such as other small-cap growth managers; there are a number of commercially available databases offered by universe comparison services that allow you to do this.
You will also want to compare your gross returns to well-known indexes that have characteristics similar to your style of management, such as the Russell 2000 Growth index. I am sure your client will compare you to the S&P 500 as most asset owners have historically used this benchmark for U.S. equities. The S&P has a larger market cap bias than your portfolio and the Russell 2000 should be more reflective of your firm's holdings.
I would suggest you also show your net returns, i.e. net of all fees, over various time periods.
However, the key statistic is your historical alpha over all measurement periods. It is the true measure of your value added and it is what your client likely is most interested in. Asset owners are always seeking alpha and they are “happy” to pay your active management fee, especially if you in fact have a positive alpha net of fees. Your client can get beta exposure relatively cheaply through index funds and ETFs and they want you to take non-systematic, specific or idiosyncratic risk in your actively managed portfolio.
You might also want to look at the Sharpe Ratio, which is merely dividing the excess return (portfolio return minus the risk free rate) by the standard deviation. The limiting factor with this measure is that you are looking at total price volatility of the portfolio and not the risk associated with your sector and stock selection. Thus I would spend some time discussing your Information Ratio, which is basically a measure of how many units of alpha you produced given the amount of excess, residual or specific risk you took. Also known as the alpha/omega ratio, this measure really reflects your value added.
If you are a “market timer” and move the beta around by raising cash when you think the market is “toppy” and re-employing this cash when you think the market is “cheap,” then you should also be able to demonstrate the contribution to the total rate of return through your cash management techniques.
If you can prove to the asset owner that your firm can generate returns that are better than what they could get elsewhere, then they will hire you.