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The Worst of Times: What Dickens Can Teach Investment Writers About Conveying Bad News

Nandini Rao 18 January 2022

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness”

So begins Charles Dickens’ novel A Tale of Two Cities, which was first serialised in 1859. Can investment writers afford to be as bold as Dickens when “the best of funds” has a slip-up on an icy patch and experiences the “worst of times” for a while? Given current economic volatility, this question is now particularly pertinent.

This Morningstar article shows that even Gold-rated funds have experienced the odd blip or two. In such cases, it is important for investment writers to communicate what went wrong and why, without causing panic. The bad news needs to be delivered in an honest, frank and reassuring way.

The case remains the same when the entire market declines. Investment writers need to craft a message without raising alarm or confusion.

“Facts alone are wanted in life. Plant nothing else, and root out everything else” (Hard Times)

Be open and transparent about the fact that the fund did underperform.  It may sometimes be tempting to gloss over underperformance by using impenetrable sentences or jargon. This temptation might be especially acute in bear markets, when investors get fixated on the short term and news headlines, where any sort of comfort can be hard to find. But this feeling should be resisted – disclosure requirements for mutual funds, in particular, are clear and extensive, so any attempts to cloud how the fund’s been performing are likely to achieve little but sowing doubt in your readers’ minds.

Transparency also involves using appropriate yardsticks to measure returns. Compare apples to apples by talking about a fund’s return in relation to its correct benchmark or peer group. Don’t compare a large-cap fund to a mid-cap index to make the fund’s returns look better in a bear market (when large-caps usually outperform mid-caps).

Excluding information about returns or using elaborate disguises is unlikely to help build trust with your readers.

“Heaven knows we need never be ashamed of our tears” (Great Expectations)

Always explain what caused the fund to underperform. In his most recent letter to the Chancellor to explain why the Bank of England ‘underperformed’ in missing its 2022 inflation target, Governor Andrew Bailey clearly identified the reasons for high inflation along with a frank pessimism about the near-term outlook. However, he also provided policy prescriptions for its amelioration:

“Prior to Russia’s invasion of Ukraine, the economic effects of Covid-19 (Covid) were uneven, with significant changes in both demand and supply, as well as their composition, over time. This led to a volatile evolution of price pressures… The invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices. It is also likely to exacerbate global supply chain disruptions and has increased the uncertainty around the economic outlook significantly. Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow… Given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist, the Committee judged that an increase in Bank Rate of 0.25 percentage points was warranted at the March MPC meeting.”

For investment writers and fund managers, take a leaf from Bank of England governor Andrew Bailey’s book and delve into performance attribution reports to identify what hurt the fund’s performance. Detail reasons for underperformance with full transparency. Perhaps a few stock picks didn’t pay off or the fund’s peer group was hurt by a common factor. The fund manager’s insights are invaluable here (see our tips on how to interview fund managers).

Performance reports should also make it clear when the fund did badly; otherwise you may risk clients judging the long-term potential of a fund by the performance of a month or a quarter.

If the word count allows, try to provide some context by referring to economic developments in the period. Did the fund do badly because of factors outside the fund manager’s control, such as ‘black swan’ events, like the Russia-Ukraine war, or natural disasters that nobody could have predicted, or Covid-19?

“Meat, ma’am, meat” (Oliver Twist)

Performance attribution can help you pick out the positives as well as the negatives. Consider a hypothetical emerging-markets equity fund that had a large overweight to Ukraine around February 2022. This may have weighed on returns. However, any Saudi Arabian exposure would have contributed to returns as the country benefited from higher energy prices. It is worth highlighting the silver lining in the clouds.

Broaden your horizons by looking beyond the period covered in your report. Look at the fund’s returns in other timeframes. Rather than just saying: “The fund underperformed its benchmark”, you could talk about times when the fund did well. For example, you could say: “The fund underperformed its benchmark in December but outperformed over the fourth quarter and the full year”.

“Consider nothing impossible, then treat possibilities as probabilities” (David Copperfield)

Reassurance is important, so avoid alarming statements such as “the fund experienced a disaster in June”. The same goes for extreme comparisons, which may be unhelpful in certain contexts or to non-financially-savvy readers. For example, GMO’s letter to investors in the second quarter of 2016 used references to purgatory and hell to identify investment scenarios. While this may fly in a hedge-fund report, it probably won’t go down as well in a fund commentary targeted at retail investors.

If the scope of areport allows, try to draw in the fund manager’s longer-term strategy. A few sectors may have performed especially badly, but the manager could still have high conviction in these sectors and expect them to turn around. Or one could highlight the fund manager’s future plans to improve the fund’s performance, just like Governor Bailey outlined the Monetary Policy Committee’s plans to bring inflation back to target in his latest letter to the Chancellor.

At the same time, don’t over-promise with statements like: “The fund should generate double-digit returns if scenario X materialises or when sectors A and B recover”. Hostages to fortune are never a good idea – even if the compliance team lets them past. As Ebenezer Scrooge acknowledged, we should always be cautious when looking ahead.

“‘Ghost of the Future,’ he exclaimed, ‘I fear you more than any spectre I have seen.’” (A Christmas Carol)