Eight Keys to Build a Track Record to Win and Retain Investors

In the highly competitive world of investment funds, building a track record is essential for winning and retaining investors. A solid track record not only demonstrates a fund’s performance over time but also builds credibility and trust. Here are the eight key elements to consider when establishing a track record for an investment fund:

Define Performance Metrics

The foundation of a credible track record lies in clearly defined performance metrics. Common metrics used to evaluate fund performance include:

• IRR vs. Geometric Returns: Understand the differences between Internal Rate of Return (IRR) and geometric returns. While IRR can illustrate the average annual growth rate of investments over time, geometric returns provide a more accurate picture of compound growth by considering the effects of volatility. Choose the appropriate metric based on your investment strategy and investor expectations.
• Multiple on Invested Capital (MOIC): This metric shows how much money has been returned to investors relative to the initial capital invested.
• Net Asset Value (NAV): This represents the total value of the fund’s assets minus its liabilities, giving investors a snapshot of its financial health.

Choosing metrics that align with the fund’s investment strategy helps accurately convey its performance to potential investors.

Time Horizon

Establishing a track record requires careful consideration of the time horizon over which performance will be evaluated. Investors typically seek long-term performance data, so it is important to determine the appropriate period for measuring success. Consider the following:

• Long-Term Evaluation: A time horizon of five to ten years is often ideal, as it provides a comprehensive view of the fund’s performance across different market cycles.
• Market Cycles: Including periods of both growth and recession can demonstrate how the fund performs under varying economic conditions.

This long-term perspective can help investors understand how the fund navigates different market environments.

Consistency and Transparency

Consistency in reporting performance metrics is essential for building investor confidence. Key points include:

• Uniform Reporting Standards: Report performance results using the same methodology and standards over time.
• Clear Communication: Investors appreciate transparency regarding how returns are calculated, any changes in investment strategy, and the underlying assumptions used in performance reporting.

Providing detailed information fosters trust and helps potential investors make informed decisions.

Benchmarking

Benchmarking is a valuable tool for contextualizing the fund’s performance. By comparing the fund’s returns against relevant industry benchmarks or peer funds, managers can provide investors with a clearer understanding of how the fund is performing relative to the market. Consider:

• Selecting Relevant Benchmarks: Use indices that closely match the fund’s investment strategy (e.g., the S&P 500 for equity funds).
• Highlighting Strengths: This comparison helps highlight the fund’s strengths and allows investors to assess its competitiveness within the broader investment landscape.

Regulatory Compliance

Adhering to regulatory compliance is a fundamental aspect of establishing a credible track record. Key considerations include:

• Understanding Regulations: Investment funds must comply with regulations set forth by governing bodies, such as the Securities and Exchange Commission (SEC) in the U.S. or the Financial Conduct Authority (FCA) in the UK.
• CFA Institute Standards: Compliance with the CFA Institute’s Global Investment Performance Standards (GIPS) is essential for funds aiming to present their performance transparently and consistently. Adhering to these standards helps ensure that performance is calculated and reported fairly.
• Implementing Compliance Procedures: Ensuring compliance with these regulations enhances the fund’s reputation and mitigates legal and operational risks.

Audit and Verification

Having performance results audited or verified by a third-party firm adds credibility to the reported track record. Important aspects include:

• Independent Verification: Independent verification ensures that the performance data is accurate and reliable, instilling confidence in potential investors.
• Choosing Reputable Firms: It is advisable for funds to seek reputable audit firms with experience in the investment sector to enhance the integrity of their performance reporting.

Historical Context

Providing historical context around performance is crucial for helping investors understand the factors that influenced the fund’s results. Consider:

• Market Conditions: Discussing market conditions, economic trends, and other external factors that impacted performance can give potential investors a comprehensive view.
• Explaining Variability: Contextualizing performance variability helps investors assess the fund’s resilience in navigating different market environments.

Required Disclosures

Transparency in required disclosures is vital for establishing a credible track record. Key aspects include:

• Performance Disclosure: Clearly presenting past performance metrics, including returns, risks, and associated fees.
• Disclaimer Statement: Including a disclaimer that past performance is not indicative of future results. This is crucial for managing investor expectations and ensuring they understand the inherent risks associated with investing.
• Comprehensive Reporting: Providing investors with comprehensive and timely reports that outline not only performance but also the underlying strategies and market conditions that influenced those results.

Conclusion

Establishing a track record for an investment fund is a multifaceted process that requires careful consideration of various factors. By defining performance metrics, maintaining consistency and transparency, and adhering to regulatory compliance, fund managers can build a credible and compelling track record. Furthermore, benchmarking, providing historical context, and ensuring proper disclosures are key to enhancing investor confidence and trust. Ultimately, a well-established track record not only attracts investors but also positions the fund for long-term success in the competitive investment landscape.

Please reach out to Keith Donald at kdonald@pinnaclefundservices.com or 1-604-559-8920 to discuss how we can help you establish your track record.