If the investment markets were as inefficient as the marketing and sales side of the business, portfolio managers would be jumping for joy - happily capturing alpha all day long! In our experience, these marketing and sales inefficiencies are present across all five of the classic “5 P’s” of a presentation...people, philosophy, process, portfolio and performance. Against that backdrop, this article discusses ideas for presenting philosophy effectively.

I have read thousands of investment philosophies in investment managers’ sales presentations, brochures, and RFPs. Many philosophy statements suffer from two major problems:

Problem 1: They don’t really cover philosophy. They speak more about investment objectives or investment process.

One firm might state their investment philosophy is “to provide clients with superior long-term returns while maintaining appropriate levels of risk.” That’s an investment objective, not an investment philosophy. Another firm might say “we combine quantitative tools with the qualitative judgment of our experienced professionals to construct diversified portfolios.” That’s investment approach, not investment philosophy. Or, “we are value-driven.” That’s investment style.

Problem 2: Most philosophy statements are too detailed with too many competing, unmemorable points.

Several quarters ago a client provided us with an RFP that had a 271 word investment philosophy statement. A different client more recently shared a 481 word philosophy statement. If you can’t get the essence down to a couple of sentences with no more than three supporting bullet points it’s probably too long.

Another philosophy we recently examined elaborates on a multitude of points, including, but not limited to focusing on market leaders, structured fundamental research, identification of a catalyst, comprehensive portfolio monitoring, well-diversified portfolios, and maximizing the power of compounding. With so many topics nothing cuts through the noise and is memorable.

Assuming these problems are avoided, what makes a philosophy statement work and resonate? What consultants and asset owners want most is to understand the root phenomena that give an investment manager an edge and allow them to systematically generate excess returns. Articulating these phenomena as inefficiencies the manager is able to identify and exploit is usually a winning formula for an effective philosophy statement.

Over the course of our work with investment managers, following are some of the categories into which managers’ investment philosophies most commonly fall:

• Behavioral psychology or sentiment based: You take advantage of behavioral tendencies of other investors
• Long-term versus short-term time horizons: Perhaps a sub-set of the above category. The most common refrain we hear in this category is “the market focuses on the short term while we focus on longer-term fundamentals”
• Low coverage: This is common with strategies operating in fringe areas where information may not be as efficiently disseminated/discounted, such as small cap equity, emerging and frontier markets or distressed fixed income
• Information advantage: You have resources that produce unique investment insights. In international real estate it could be “on-site insight.” In multi-sector fixed income it could be scale of dedicated, specialized investment staff
• Seeing the world through a different prism and/or categorizing things differently than others: Your approach or categorization is unorthodox. You see the world differently than others - leading you to gain unique investment insights from roughly the same information others possess.

In this era of movement from active to index strategies, how you articulate philosophy and your edge is more critical than ever. To improve how you cover investment philosophy, ask the following questions. Are your philosophy statements really covering philosophy? Are they concise? Are they focused on what resonates with consultants and asset owners?