How to communicate a stumble in performance

I run the client service team for a midsize investment management firm in the U.S. The performance on our flagship product over the past 12 months has really deteriorated compared with our benchmark and other managers with the same strategy and management style. My boss, who runs the firm, doesn't think it's a real problem and doesn't want my team talking with the clients about it for fear they will get nervous and want to remove us. What do I do?

You are absolutely right to be concerned about it, but that is light-years away from being panicked about it.

There are some obvious questions to be asked and rigorous analysis to be done to understand the root causes of this relative underperformance. You have to have done your homework before you can create an effective communications plan for speaking to your clients.

Some of the questions have obvious answers, but may not necessarily have contributed to a negative outcome: Have there been any material changes in the way the team manages this product? Has the decision-making process basically been the same over this period? Have there been any senior investment personnel changes?

Recognizing that markets all around the world have experienced unprecedented volatility over this period, has the product experienced abnormal volatility especially compared with how the portfolio behaved in other volatile periods? Is the portfolio more concentrated now than before, which could have exacerbated the volatility over shorter time periods?

My point is, you need to determine the possible causes of this underperformance looking at beta levels, economic sector exposures, industry group comparison, specific or non-systematic risk levels and the use of residual cash if any “market timing” was involved.

Once you have a sense as to what has caused this underperformance — and we will assume it was not caused by random bad luck, which is almost a given — then you should begin to prepare, for your boss to review, a communications plan for your clients. The most important basic premise is that it is much better to be proactive with your clients on this performance issue than denying it exists through inaction.

You want them to know that you are aware of the relative return issue and that you are “on top of it” and have analyzed possible reasons for it. Moreover, you as a firm are doing something about it. Your clients will really appreciate this and more than likely stay with you because you believe this situation, in the scheme of things, is a short-term phenomenon. In some situations, it would be preferable for your boss to deliver this message in person, either at the next regularly scheduled meeting or set up a separate meeting if the regular meeting is too far in the future. Again, you don't want the firm to appear overly defensive or be perceived as panicking. Good client service anticipates what your client may be thinking and then proactively deals with the situation, which in almost every case will defuse the negativity.