Over the last few months, we have been looking at how a fund can establish its "right to exist", thereby holding the attention it needs from potential investors to make the case for investment and secure commitments. We started by looking at the Goldilocks Principle (finding the right balance between familiarity and relevance, on the one hand, and idiosyncrasy, on the other). Last time, we covered the Manager's Paradox, which prescribes the particularly tricky feat of demonstrating that your investment strategy is easily repeatable (by dint of its simplicity and your experience) but also, at the same time, impossible for others to clone (owing to your proprietary networks, data, skills etc.). A paradox ought to be difficult and the Manager's Paradox, certainly is. Now we find ourselves at the last chapter of this series: The Pragmatist's Manifesto.
In essence, the Pragmatist's Manifesto makes only simple demands on a fund manager. And, as ever, these demands mirror the questions lurking in the minds of institutional investors, from the ivory towers of Ivy League endowments to the private island musings of the self-made ultra-wealthy.
The Pragmatist's Manifesto declares that there is a "noble vision" supporting the investment strategy, but that this is equalled by a dedication to ensuring that the investment outcome is positive, which is to say: it will return a healthy profit to investors. A manager does need to demonstrate that the fund's purpose is righteous, but not at the expense of it being effective.
Of course, this is a relationship that the SRI (Socially Responsible Investing) industry has been contending with for many years, but the rise in importance of ESG (Economic, Social and Governance factors) to investors has driven the matter firmly into the mainstream. Let's take a closer look at the manifesto's key policies:
Demonstrating that your purpose is Righteous
Everyone likes money, and investors are no exception, but there must be something more, no? Whilst there are investors whose interest in your fund will be entirely pecuniary, others will certainly prefer a fund with a righteous purpose over one without. This doesn't mean that your fund has to donate 50% of all profits to fund clean water projects in the Amazon basin, although it could be that, of course. Instead, it might be that you are motivated to improve employment prospects in local geographies or it can be as simple as wanting to empower impressive entrepreneurs to grow their businesses, successfully, in an environment of reduced bank support. The key is framing your strategy the right way.
Proving that your strategy will be Effective
The other key policy of the Pragmatist's Manifesto and, to most investors, the more important one, is that the strategy has to make money. Funds that focus on the righteous purpose of their investment strategy may find themselves less inclined to give details on the anticipated return. But, in a competitive marketplace, where there are multiple investment opportunities promising to deliver an impact as part of their mission, the funds that look likely to deliver a profit back to investors (to be reinvested in good works, perhaps) stand out. You must make sure that your investment process is well thought through and equally well documented and your track record of making profitable investments, such that this is available, should also be included in your materials.
So, there you have it: three elements to proving that your fund has a right to exist.
To summarise, fund managers need to be on top of:
The Goldilocks Principle (the right balance between
relevant and exceptional)
2. The Manager's Paradox (a strategy that is repeatable yet exclusive)
3. The Pragmatist's Manifesto (ensuring that your purpose is righteous without compromising its ability to remain effective)
And once you have them mastered, you can put them into practice using our simple POISE methodology, which outlines some simple steps to effectively pitching your fund to potential investors.
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