News • September 7, 2016
Castle Hill’s Andrew Saunders Quoted in HFM Week’s “Crisis Communications: IR in Troubled Times”
Crisis Communications: IR in troubled times
Communicating with investors when your firm is under pressure
By Michael Sheen
Article excerpted from HFM Investor Relations on 26 August 2016
It’s an essential responsibility of investor relations personnel to be prepared for any eventuality and have the processes in place to communicate effectively with investors.
“Asset management is a relationship business and in difficult times these relationships are tested,” says Andrew Frost, investment management solutions director at Laven Partners. “The risk is that if crises are not handled right then this can destroy the relationships built over time.”
Melanie Rijkenberg, an associate director at $10bn FoHF Paamco, says there’s no space for managers to hide in times of crisis.
“It’s extremely important to hear any relevant news from the manager, rather than from any other source. If it’s bad news it’s even more important to hear it directly,” she says. “It [becomes] a trust issue if you don’t and it can lead you to question the strength of the relationship if you have to read about it in the newspaper, for example.”
In order to maintain these relationships, crisis communications needs to happen immediately and across multiple channels. But the nature of the communications will differ, depending on the event.
Difficult conversations about performance are perhaps most familiar to IRs, but can be helped by ensuring investors are well informed about your strategy and understand why decisions which led to losses were made.
“It’s about fixing the roof while the sun is shining,” says Andrew Saunders, senior managing director of Castle Hill Capital. “When things go against you, you need to have evidence of being open and that you have considered that this was a possibility.”
Saunders says this should be done by keeping investors informed through monthly performance reports, quarterly letters directly discussing the portfolio and decision- making process, and regular conference calls.
Elissa Kluever, an Omni Partners managing director and partner who leads IR for the firm’s credit and lending funds, says expectations need to be managed before a bad month occurs.
“Poor performance [needs to be] within the realm of investors’ expectations, meaning you provided an indication to them of what a good and bad month looks like [for your strategy],” she says.
A London-based third-party marketer says that having strong past performance can also soften the blow of a bad month and hides “a myriad of sins”.
“If you’ve historically returned 25% to 30%, it can be different story to if you’ve been down for three months in an asset class where performance has been low for a couple of years,” he says.
The Bigger Picture
The impact on performance of large macro events, such as the UK’s vote to leave the EU in June, are harder to control.
But communicating effectively with investors before and after systematic shocks occur can help to ease their concerns, says Laven Partners’ Frost.
“Investors do not like surprises. So if you are saying that the strategy is not correlated to markets then what happened post-Brexit? Were you correlated? If yes, why?”
Kluever explains that Omni Partners’ IR response differed in a predictable event – Brexit – to one that was unpredictable, such as the Swiss depegging of the franc at the beginning of 2015.
The Swiss peg removal was a binary event and explaining poor performance in that environment was “reasonably straightforward” she says, while for Brexit, they told investors prior to the vote that they had planned for both outcomes.
When receiving a significant redemption, there is often a fear it could lead to other investors following suit and while it may seem sensible to try and prevent such a major blow becoming public knowledge, Kluever says it’s worth being transparent with your remaining investors.
“People are going to find out,” she says. “If you’re on the front foot you can control the message.”
Castle Hill Capital’s Saunders agrees. “It causes no shortage of disgust and contempt for the industry when managers get a large redemption and don’t tell their other investors.”
He adds that allocators and their consultants communicate with each other, so they will find out.
Saunders argues that there is opportunity to be gained from having a major redemption, by offering remaining clients the chance to replace the investment with a discounted management fee.
There have been high-profile cases where firms have had to close products or shut down entirely because of the departure of key figures – in 2004 BlueBay had to close a $1.4bn macro fund following Neil Phillips’ departure.
Paamco’s Rijkenberg says decisions on future investment in a manager following a key departure are taken on a case-by-case basis following an evaluation of their business going forward.
“A key staff departure doesn’t necessarily lead to a deterioration, although it certainly requires a full-fledged re-assessment,” she says.
Staff departures can trigger key man clauses and key man risk concerns but are a manageable IR challenge, says Tom Quinnen, managing director and head consultancy Stevenson James’ investor relations practice.
“If it’s a person who has the predominant attribution of the track record, then maintaining the clients can be tough,” he says. “But if clients are informed well before a departure and there is a managed exit, then it can be different story than if they have been told three days before the departure, for example.”
Castle Hill’s Saunders warns that firm size can restrict your ability to navigate a key man clause.
“This a people-driven business and, up until a certain AuM level, investors are buying that person’s investment decision-making, not the firm’s,” he says.
However, there are often limitations that will delay how soon you can inform investors of a staff departure, whether legal or simply personal issues, but communicating that message as soon as is feasible is essential.
Under Regulatory Scrutiny
The IR professional is arguably most limited by what they can and can’t tell investors when those investors are likely to be most concerned. Regulatory scrutiny can come in different levels of severity, but the IR function is likely to lose precedence to compliance needs in these situations.
“You get the lawyers involved pretty quickly, who, unfortunately, will generally dictate who can say what to who and when,” says Saunders. “You lose control of the narrative.”
But experts say that where it is possible to keep investors informed it is essential to do so, particularly before they hear it from another source.
“The last thing investors want is an anonymous organisation when it comes to the delivery of potentially bad news,” says Laven’s Frost.
The Cyber Threat
Investors are increasingly savvy about cyber threats. Institutional investors are themselves targets of cyber criminals and the fear of a breach is one held by many investors who wouldn’t want the details of their investment leaked.
While the first task in the event of a cyber breach will be to establish the facts, such as which systems are involved, what categories of data are affected and how long has the attacker had access, IRs also have to take action.
Ian Birdsey, partner at technology focused law firm Pinsent Masons, says that while a technical and legal response is be essential in the event of a cyber breach, effective communication with investors will be paramount.
“It’s crucial to be entirely confident and certain about the message you are sending to reassure stakeholders and the market more generally,” he says. “You can’t afford to open the door to more questions.”
He adds: “Investor relations need to be working closely with legal and other business functions to ensure the message is accurate and uniform across the business.”
Maintaining the Relationship
Fundamentally, successful crisis communications will result in the retention of a clients, and Omni Partners’ Kluever says there is also the potential opportunity to build upon and strengthen relationships with allocators.
“If you handle these communications correctly, the relationship with the investor can be made stronger,” she says. “If Investors know you can be relied upon to proactively communicate something negative, the trust they have in you and your firm increases.
“As a result, they are more likely to be willing to accept difficult periods because they know you will be transparent with them.”
Paamco’s Rijkenberg agrees, saying: “If the manager is up front about it, the reasons behind the problems are understood and the ramifications are not that severe, then the relationship can absolutely be made stronger.”
Article exerpted from HFM Investor Relations
Please find the full issue here: https://hfm.global/hfminvestorrelations/analysis/crisis-communications-ir-in-troubled-times/
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