Asset managers need to create a narrative about what they do and how they do it.  Lacking a story, it’s all about the numbers.

You might say, “Well, that’s the way it should be.  This is a performance game.”  Except that’s unrealistic.  Everyone has periods of underperformance and clients who lack understanding of an asset manager’s approach are more likely to bolt at the wrong time.  That’s typically bad for the clients and obviously bad for the manager.

To be clear, creating a narrative that is dishonest and manipulative is not a tenable long-term strategy (in addition to being just plain unethical).  On the contrary, trust is built through transparency, awareness, and education about the real way an asset manager navigates the markets.

The narrative should be effective and truthful.  If you don’t have a powerful story to tell, you’re going to have a hard time of it and will be fighting a one-dimensional battle for assets under management.

Those on the other side of the table — asset owners, consultants, and advisors — should have a different goal entirely:  to crack the narrative.  Not for the purpose of being antagonistic, but because their responsibilities demand it.

Yet, in my experience, few try very hard to do so.  Therefore, an asset manager can often frame the narrative with little if any resistance.The New Yorker | For more on the importance of “framing the narrative,” see this piece about Ted Cruz.

That is especially easy to do when it comes to communication about the investment process.  The descriptions of process as crafted by the manager — and the illustrations used to visualize it — often find their way into due diligence reports and the like, without being seriously vetted in any way.

Such verbatim usage of information created by the manager (and apparently not “cracked” at all by the recipient) is extremely common and often occurs without attribution and without second thought.  I have seen whole sections of biographies and philosophies and histories from managers used with little or no editing or paraphrasing in reports “for the file” at advisory firms, research firms, and institutional investment offices.

Cutting and pasting content is easy — but in the process you cut and paste your tacit approval of the manager’s story.

That’s a simple example, but it is representative of a broader phenomenon:  far too much of what is presented by managers is accepted without challenge by those who should be skeptical about everything that they are told.  That failing is compounded by the fact that an extremely high percentage of the qualitative information on which selection decisions are made comes directly or indirectly from the manager.

When things go awry (in little ways or big ways), the context is once again provided by the manager.  Invariably, the person charged with investigating begins by saying, “I talked to the manager and . . . .”  What ensues is further reporting of the narrative (as adjusted, if necessary, to fit the new circumstances).  It might seem that getting information “from the horse’s mouth” is superior to any other source — but it is not at all.

Truth be told, much work that is placed under the banner of “due diligence” is mere reporting of the narrative of the manager, not an informed investigation of it.

Superior due diligence involves an attempt to crack the narrative, not to repeat it for consumption elsewhere.  An evaluation process is at its best when it exposes the shortcomings that exist (there always are some) and weighs them appropriately in the body of evidence.  It is at its worst when the words and stories of those being evaluated become the words and stories of those who are supposed to be doing the evaluation.