Over the last 9 months I have had the opportunity to work with a variety of asset managers whose AUM ranges from $20 million to $100 billion. These have all been great assignments and I hope I have been additive to their business strategy and execution. The one constant throughout these client engagements is they have trouble “admitting defeat” when it comes to product that has performed so poorly that it is simply unsellable.
Most suffer from the same thought process: “this was once a great strategy and it will eventually come back in favor”. Some of these Portfolio Managers are too blind to realize that they have dug a massive, and unfillable, performance hole. The biggest enemy tends to be time and career risk. How long will it take for you to get out of the hole and are you too worried about your career rather than “admitting defeat”? Maybe it’s a pride issue but sometimes funds simply need to be killed. They can be liquidated, or merged, but status quo isn’t an option.
Unfortunately, most asset managers will just let the product “bleed out”. They acknowledge the poor performance but don’t want to lose the revenue associated with the strategy. They could merge with another strategy but are likely fearful this will awake a comatose asset base when the merger solicits a proxy. A proxy will remind them they own the fund and then redemptions spike up. Additionally, there is an added cost to proxy a fund. Even a fund mandate change would most likely have to go to proxy.
Another major issue is time: Most likely these funds are in massive net redemptions and the wholesalers are spending too much time defending the undefendable. I used to think that good relationships could stem redemptions by convincing the Financial Advisor to be patient and give it some time. In reality, performance is the KEY component when deciding to buy or sell any product. Is an Advisor really going to risk getting fired by a client because of their “loyalty” to a product…or a wholesaler?
While I do not want to “call-out” names there are countless examples of Funds that are in the 95th performance percentile (or worse) for 1-year, 3-year, 5-year, 10-year and Life of Fund. How is this acceptable?
We all know that every strategy will ultimately deliver a “pocket of pain” – this is when the market isn’t rewarding the underlying portfolio. These “pockets of pain” are the price of admission if you want active management and the opportunity for alpha. But when they turn into an all-out fall from grace then managers need to step-up and do the right thing. Admitting defeat is not a bad thing. It’s cleansing . . . and it gives you the opportunity to move forward.
Good luck!