The mistake: Mismatching their product design and their target investors.

Summary:

Okay, let’s do one more. Think of it as a bonus mistake, #6 of 5: Mismatching your product design and your target investors. #6 is kind of related to the mistakes that came before it, especially to #5 (not qualifying your prospects). And, come to think of it, #2 (rushing your investor).

Say, for example, you come up with a synthetic way to reproduce a certain allocation. It’s cheaper to reproduce, but you still get the directionality.

For you, it’s exciting and intellectually stimulating. But as for your customers, maybe they haven’t even thought about it, and even if they have, it’s too complex for them to get comfortable with.

Qualifying will be especially important here. And don’t forget that the people you designed it for might not even be the right candidates. And when you do find the right candidates, don’t forget mistake #2 (rushing your investors) — you might have come up with the idea in a rush of inspiration at the airport, but your investors will probably need more time to get their heads around the idea.

[notification type=”normal”]Get the whole series, 5 Mistakes Fund Managers Make: just sign up with your email address here.[/notification]

The full audio:

Transcript of the audio:

Matt:

How about point number six? Do you want to move on to point number six?

Baldwin:

Yeah.

Matt:

Okay, so what’s on your mind?

Baldwin:

Product design. Product design is very important, but it’s also a very complicated subject. It kind of cuts two ways. You can be either too innovative or too lagging. Let me unpack this a little bit. Let’s start with being too innovative. We can come up with investment strategies that come as a result of our expertise. It may be an awesome idea. They usually are. They’re very interesting constructs, complex strategies, especially in the hedge fund space or if you’re doing structured products, but the market is absolutely not ready for it.

For example, this has to do when you come up with a synthetic way to reproduce a certain allocation, which makes it cheaper to reproduce but you still get the – not to sound too technical – directionality of what you want to do.

Often what it is is that in your mind, as a manager, it may be the optimal construction, but then it becomes very difficult to go and position it to people. First of all, they haven’t even thought about the possibility of it.

Secondly, it’s way too complex for them to get comfortable enough to understand. It’s going to take you way too long to make them comfortable. By the time they’re comfortable, the opportunity has passed. This happens in structured products, and this happens in the realm of let’s say more complex finance engineering.

In fact, we once made that mistake. I remember we went down to southern Spain. We saw a big savings bank, and we had this idea that we cooked up in Frankfurt on how to get a good return from the markets while protecting the downside. It was very, very exotic construction at the time. Now it’s quite commonplace. The savings bank said, “That sounds awesome. All right.” We went back to the workshop, to the lab, and we made the product and said, “Guess what? It’s ready. Let’s go.” And that guy wasn’t willing to stick his neck out. That guy wouldn’t even know how to even start talking about it with his investment committee. We were too early. The thing is, six months later it turned out to be the best selling product for a year, but they never invested in it. That’s just to show an anecdote. The person we made it for never invested. How crazy is that?

Anyway, that’s on one spectrum. That’s too difficult. It’s appealing as an investment manager, from an intellectual … It’s motivating. It’s nice. On the other extreme – this is where a lot of managers fall into the temptation – is that everybody’s been buying for example let’s say Bitcoin or everybody’s been buying S&P 500. S&P 500 is up by I don’t know how much. You know how the media thing goes. “It’s never going to end.” They realize that everybody around them has been in. This is what the bubbles are made of. Everything becomes so obvious, and then the manager says, “This is what the people want.” People walk up to their bank man and say, “Hey, do you have that kind of strategy?” I think it was Rockefeller who said when a shoe-shiner asked him about the stock market is when he cashed out. I think that’s what happened. A lot of managers are very attracted to short-term flows because they can build up a portfolio very quickly and get all the fees.

The problem with that, usually, is that six months down the road it all starts unraveling. Investors lose money. They’re unhappy. They’re never coming back. Product design is important. I think before that was difficult, in the days that I was really involved in fund management. It was kind of more difficult because you’d almost have to, in a way, go door to door. Today, with all the data out there and today if you’re willing to upgrade your marketing department and equip it with a little bit more sophisticated online tools for searching what the appetite is, that’s probably the better way to construct the product. You can sort of anticipate. I guess another way to say it is, instead of going in and launching the product or creating the product, what you probably want to do is you want to start floating the idea in the form of content and then see what the interaction is. By the time that opportunity is starting to shape up, then you probably have a willing investor base who’s right on time.

I’ll give you an example of this. Recently, the emerging markets – this is two or three years ago – have sold off massively. A lot of managers were out there basically explaining what was going on in the markets. They weren’t trying to motivate people to buy the emerging markets, but they were trying to make them understand a little bit better that, “Look, this is on the way down, but it’s going to bottom out. It’s not going to go below an intrinsic value. It’s going to go below that, but not much. It’s going to bottom out. It’s going to bottom out.” They kept on, and there’s a handful of managers that really capitalized on that. Since they weren’t really aggressively promoting emerging markets but they were informing people about what was going on, guess what happened the moment they said, “We think it’s time?”

Matt:

What happened?

Baldwin:

Well, they captured a lot of the inflows because there’s been a recent emerging market rally. I’m not going to name names on the podcast. I don’t think that’s right to do, but there are a few, and a couple of big managers who actually did this one right. They captured a lot of inflows just because they were keeping people posted on what’s going on in this space, keeping them educated and preparing them to get comfortable by the time it was going to turn around.

It’s difficult to give concrete advice around this point, but, again, I think it’s when you shift your marketing towards selling more towards education. When you get someone’s trust and you become their mentor in a way, and if you’re feeling comfortable with making a recommendation at a certain point, those people who you have been educating and you say “now is the moment,” your response is probably going to be good. You’re going to have successful fund launches. It’s simplistically explained. I don’t really know much about it, but I have a few friends in the fashion industry. That’s exactly how they work. They have to think about what’s going to be in three seasons down the road, and there’s people who have really figured out how to spot that. There’s a whole industry that does that for them. They make a lot of money doing that, by the way.

Matt:

Oh yeah.

Baldwin:

It’s very important.

Matt:

There’s a lot of money in forecasting the future.

Baldwin:

Yeah. I think if you can get into that, in the investment management industry, or start thinking like that as a fund manager, there may be a pot of gold at the end of that rainbow.

Matt:

Yeah. Was there anything else that you wanted to dig into, or shall we finish up the recording here?

Baldwin:

There’s probably a lot more, but let’s save that for another time.

Matt:

Yeah, let’s save that for another time. End of formal recording.