By Diane Harrison
Money is one of the driving forces of both business and warfare: he who amasses the most money often wins the battle, both on the field and in the markets. Money equates to power, power garners action, and action ultimately shapes the future.
Napoleon is generally considered to be the forerunner of the age of modern warfare. An interesting parallel can be drawn between the changing face of warfare following Napoleon’s evolutionary tactics and the competitive landscape for raising assets in the alternatives markets today, where the battle for dominance and success has undergone its own global revolution since the mid-2000s.
Investors are waging an entrenched war between seeking returns while balancing risks, often falling short of both objectives. A recent survey (Natixis Global Survey of Individual Investors, May 2014) provides some interesting statistics and observations to contrast with several of the modern warfare tactics introduced under Napoleon over 200 years ago.
The French Revolution involved an armed force organized by divisional formations. Napoleon’s attacks started with advance forces leading a skirmish, followed by substantial reinforcement forces massing in surprise flanking and enveloping attacks against the enemy, designed to utterly destroy opposing forces. Because of the complexities of engaging in this new style of warfare, the development of general command staff began to emerge under Napoleon.
The Natixis survey, conducted globally with just under 6,000 high net worth investors during March 2014, found that, ‘…investors are torn between a desire for high, historically unrealistic, returns and insecurity about taking on risk’. The survey statistics reveal that ‘70% of investors globally face an ongoing psychological battle between the hunt for investment returns versus the preservation of capital [67% in 20131], and tied to this, 86% of investors seek to balance risk and return [84% in 2013].’
A comparison of key warfare tactics (courtesy of the website www.molossia.org) and success strategies for asset management offers some interesting observations that may help smaller managers grow their business, and, ultimately, shape their impact on the investment landscape at large.
TACTIC ONE: THE OBJECTIVE
“My business is to succeed, and I’m good at it. I create my Iliad by my actions, create it day by day.”
– Napoleon (1804)
Having a clear vision of key business goals is vital to the success of any organization, but particularly for alternatives managers. Based on the Natixis survey, market volatility has eroded confidence in the markets for two-thirds (66%) of investors worldwide. To gain investors, a manager must be able to articulate what it is they intend to do with the investor’s money, how it will be achieved and measured, and why they are the best professional to achieve this. This is a far more pragmatic and specific explanation than offering up a generalized mission statement, such as, “To offer investors attractive, risk-adjusted returns across a range of market conditions,” but unfortunately, this is where most managers stop when articulating their objective goals.
Managers today must offer investors far greater insight into their ability to dissect market activity and extract investment opportunities and results in order to win their capital. The first step in winning the war of asset-gathering begins with articulating how you are capable of doing so through a demonstrated and understandable process.
TACTIC TWO: THE OFFENSIVE
“To have good soldiers, a nation must always be at war.” – Napoleon
Most of the investment community, managers and investors alike, would agree that staying on top of the markets is a battle in itself, and never more so than over the past 7-8 years. Alternatives managers are acutely sensitive to the war of attrition (in the form of redeeming assets), as well as to the intense ongoing battle for acquisition of new assets in their fiercely competitive investment world. Although he may have worn a wreath of them on his head as Emperor of France, Napoleon knew better than to have rested on his laurels and managers who want to get ahead need to embrace the same sense of urgency in managing their business.
Waiting for performance results to bring in new business or hoping investors will find the company through database searches and come knocking on the door to invest is the warfare equivalent of capitulation. Assets are won through positive, proactive, and effective outreach to the investors who are seeking opportunities in line with the manager’s style and delivery. This translates to a daily and continual effort to meet these objectives though all facets of the business, including investment, marketing, and operations activities across the board. Alternatives managers should establish a business plan for meeting objectives, conduct regular status checks on the efforts of the investment, marketing, and operational teams and course correct where a gap is identified.
TACTIC THREE: SECURITY
“It is better to have a known enemy than a forced ally” – Napoleon
Knowing your weaknesses and how to address them is as essential to success as capitalizing on strengths. Most people, and alternatives managers are no different, are much more comfortable talking about and devoting attention to improving that in which they excel. But improving on what’s lacking in a business will yield greater long-term results, as that improvement effort widens the potential pool of investors who will have less of a reason to rule out the manager based on shortcomings. In addition, it forces a manager to take a hard look at the intellectual and technological inventory of the company, and work on improving areas that fall short. It’s often a difficult task for an alternatives manager to devote time and resources to pinpoint what’s not going well in the firm, operationally as well as in marketing, as opposed to spending a greater portion of time and money on ramping up the success factors in an effort to deflect or minimize the weaker areas of the business.
But in terms of marketing to the ultimate consumer, the investor, the Natixis survey reveals that, unfortunately, despite two-thirds (66%) of investors globally indicating a traditional approach to investing is perhaps no longer fit for purpose, nearly six in ten (57%) say they don’t understand alternative investments and one in two (51%) don’t feel they have access to alternatives as an individual investor, including 44% of high-net-worth investors. Investors are hard-wired to identify reasons not to invest, and they often employ advisors to help guide them in the identification of these risk factors when considering new investment managers.
For alternatives managers looking to improve their odds of winning new assets, it can be helpful to partner for a period of time with an outsource consultant to help identify these areas needing improvement, and work together to evaluate the people, processes, and performance measurements that need upgrading.
TACTIC FOUR: UNITY OF COMMAND
Soldiers usually win the battles and generals get the credit for them. – Napoleon
The people that are integral to the running of a business ultimately bear the most responsibility for its long-term success. This can be a hard truth for some alternatives managers to accept, as they often believe that numbers, not people, drive the business at its core. But people with money invest with people who produce results. The investment essentially boils down to a decision on the people behind the performance.
One of the hardest shifts for alternatives managers to accept has been the dramatic change in investor sentiment from a preoccupation with return to a higher fear of risk. The Natixis survey, representing a global heat map of current investor beliefs, makes this clear: the rise in confidence across many countries coupled with a pervasive risk-averse attitude could reflect a new normal, in which increased confidence (in overall market performance) does not translate into increased risk-taking.
The manager who stubbornly clings to the belief that performance ultimately trumps all, and remains convinced that, “if you post it (e.g. high returns), they will come,” is putting their business at risk of missed opportunities to grow assets. The modern-day war for asset growth requires a new approach, including efforts to amass the right human capital to build trust and confidence through an integrated team that resonates with investors.
TACTIC FIVE: ECONOMY OF FORCE
“Strategy is the art of making use of time and space. I am less concerned about the latter than the former.
Space we can recover, lost time never.” – Napoleon
There is no doubt that alternatives managers of all persuasions are in a battle for assets that is a marathon, not a sprint. This requires a systematic and disciplined approach to gain ground. The marshalling of forces is perhaps most crucial in the first line of defense, educating investors. Education that provides a solid base of knowledge about the sector and its role in portfolio investments is vital in the early stages of raising assets.
A financial reason for doing so is backed by the Natixis survey findings: Understanding alternatives is very closely correlated with investing in alternatives, with a cross-sectional correlation coefficient of 88%. This is much higher than for discussing alternative investments with an advisor. This seems to point to the fact that there is only so much an advisor can do in talking about alternatives with their clients; it needs to be the clients who engage and get an interest in understanding what it’s all about, before they can feel confident to invest.
Managers ready to take inventory of their operations and resource capabilities and embark on the process of first educating and then marketing to investors will likely achieve greater gains over the long run. Preparing themselves and their team for a sustained effort appears to be a better battle plan than a short-term, high-impact method. The shift in focus from marketing in a hard-hitting, widespread way to a strategy that begins with education designed to teach investors about the ways to evaluate alternatives is one that managers need to embrace now, not in the future.
TACTIC SIX: MASS
“There are but two powers in the world, the sword and the mind. In the long run the sword is always beaten by the mind.” – Napoleon
Once a manager has decided upon an appropriate course of action, creating the environment for achievement begins with planning, followed by execution. It is a highly correlated process that requires organized effort backed by sufficient resources to achieve success. Many a great idea has been stymied by a lack of conviction in seeing it through, but probably an even greater number of efforts have failed because they lacked a planned process for successful completion. Alternatives managers rarely lack conviction in their abilities, but perhaps fall short of owning the execution skills to see a plan through to long-term success. This is one of the main reasons that assembling a strong team (in-house and outsourced) is a trait shared by many of the highest achievers in the industry.
If we return to an earlier description of the beginnings of modern warfare, Napoleon’s attacks started with advance forces leading a skirmish, followed by substantial reinforcement forces massing in surprise flanking and enveloping attacks against the enemy. This effort required the development of a general command staff under Napoleon. Similarly, an alternatives manager must embrace the notion of massing directional force and growing an appropriate chain of command to carry though the various initiatives, that together, form the overall business plan.
TACTIC SEVEN: MANEUVER
Victory belongs to the most persevering. – Napoleon
Finally, the evolution of success requires a flexibility to adapt, both on the battlefields of war or in the financial trenches. Devising a plan and the means to execute it also includes having the foresight to change course or redirect around obstacles as they appear. Dogged determination to stay the course can work under some scenarios, but there are times when redeploying efforts and capital short-term is the better course of action long-term.
The Natixis survey summarizes the dilemma faced by today’s investors: The path forward calls for a change in investors’ approach to investing, one that includes a new understanding of risk and reward, more meaningful performance benchmarks and disciplined involvement in the investment process with an advisor who understands their goals and personal risk tolerance. It is an approach that manages risk by using it as a portfolio advantage, rather than a necessary evil of investing. Through diversification that levers upside and downside risk with correlated and non-correlated asset classes, investors can move beyond the risk/return impasse and build portfolios that aim to accomplish both.
For today’s alternatives manager, adapting an approach that addresses the desires of these investors makes good business sense. Employing tactics, some perhaps borrowed from the modern warfare toolbox, can support this effort through creating an educational environment that influences these investors and their advisors and moves both toward a greater comfort level with alternatives investing. This tactical approach may yield real results that grow alternatives managers’ business.
Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. Panegyric Marketing received consecutive year awards in 2013-14 as IHFA’s Innovative Marketing Firm of the Year and AI’s Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrison’s work has appeared in many industry publications, both in print and on-line.