Ideal quarterly investment letters: Meaningful, specific, and short

Investment managers’ quarterly investment letters should be meaningful to clients, specific to the manager, and short. These are the key conclusions I drew from my quarterly investment letter survey that I conducted some years ago. I believe these conclusions still apply.

Meaningful content

“Clarity,” “insight,” and “candor” were the most popular answers to the question, “What’s the ONE WORD that best describes what investment managers should strive for in their quarterly letters to clients?” I think these popular answers can be summed up by the term “meaningful content.”

The image below gives a visual overview of the responses. Type size is proportional to the number of respondents choosing a word as their answer.

 

Here are examples of how respondents explained their word choices.

  • “Clarity” suggests that you have done the reading, research, analysis and due diligence on what you’ve taken in. You have synthesized it. Rather than repeating a litany of what you’ve read, you provide a simple summary of what key points you commend to their attention and why.
  • Clarity. Clients appreciate honesty, and the best way to demonstrate honesty is to be clear in what you are saying. Always consider the client’s perspective. Put yourself in their shoes and ask yourself what is important / relevant, and how you would want it shown. And be honest with your answers.
  • Candid. Warren Buffet discusses both types of investment – the ones that made money and ones where he lost – candidly.
  • Clarity – The world and financial markets are very dynamic, intertwined, and complex. The ability of an investment manager to take seemingly disparate and complex topics and distill them down to an explainable relationship, etc is rare but very value-added.
  • Needs to reflect the voice of the investment team not marketing fluff.
  • Relevance – As a customer, it’s about my money, my future, my family, it’s not about your strategy, your brilliance, your research department. I need to know: Can I count on you?

Content specific to the manager

The survey asked respondents to specify whether various letter components were very important, important, somewhat important, unimportant, or not applicable. Respondents placed the highest importance on the manager’s investment strategy and review of the past quarter’s portfolio performance. Here’s the rank order:

  1. Manager’s investment strategy
  2. Review of the past quarter’s portfolio performance
  3. Manager’s market outlook
  4. Graphs, tables, or other illustrations
  5. Client-specific portfolio returns
  6. Stock-specific or security-specific comments
  7. Sector-level strategy
  8. Review of the past quarter’s market and economy
  9. Something not listed above

These results say to me that readers want content they couldn’t read elsewhere.

Here are some relevant responses:

  • The investments are a commodity…the client bought the firm and that brand should be consistently presented in all interactions.
  • What is missing in the vast majority of reports from managers is any genuine clue as to how and why they made/lost money. Market or asset class reviews or forecasts and returns summaries are ultimately meaningless if the manager doesn’t understand the drivers of his return. I like to see a thorough and genuinely insightful “attributions analysis” that makes it plain to the reader that the manager knows precisely why/how/where the money was made.
  • Needs to be something more than what I get from Bloomberg or WSJ commentary. I want to understand their outlook, and how that shapes their strategy.
  • Manager should include “what went right, what went wrong” during the quarter relative to investment performance. In other words, performance attribution at a high level.

Keep it short

More than 40% of respondents thought a quarterly investment letter should run two pages or less. A length of five pages or more was the least popular response, as you can see in the graph below.

Respondents favor shorter letters that are reader-friendly, as the comments below show.

  • Investors want you to tell them what THEY need to know, not everything YOU know!
  • I read a lot of quarterly letters, and I selfishly would like to be able to pull out the important nugget(s) quickly. More importantly, as an investment advisor I know that my clients will not put a lot of time into reading these letters. If they look long and boring, they simply won’t bother.
  • As an investment manager researcher, I read numerous quarterly commentaries from our sub advisors. The managers that are able to deliver the highlights clearly and in a concise manner stand out because they are better able to communicate their message to me and our clients.
  • In my experience in investment communications, I’ve learned that less can be more. Get to the point quickly! Most financial advisors (and investors) don’t have much time to read and are in a state of information overload. Many receiving a 3-page commentary will put it in their “read later” pile (meaning it may never be read). However, if they received a shorter commentary (1-page would be ideal), they might read it upon receipt, getting information in a much more timely manner.
  • People are busy and finance isn’t always the easiest or most scintillating topic; keep it short and sweet so you can keep your clients engaged and informed, Value their time.
  • After three pages, most people get bored 🙂

Make it personal

It’s not easy to make quarterly letters feel personal and customized without spending lots of time on them. Some of the techniques that respondents suggested for achieving this included:

  • Using “you”
  • Integrating data from portfolio accounting
  • Know the type of client that is attracted to your investment strategy and speak to that client’s biases and need for information.
  • Answer the question, what is in it for them? Comfort them? Encourage them?
  • Add a personal note within the body of the letter. “I took my son shopping for school supplies and Walmart…” and if there is an investment tie-in, so much the better.
  • Include  a personal touch regardless of how long it takes. These clients give us their hard earned money to manage and we should take time to report to them.

Well-written

A number of comments supported my belief that letters should be well written.

  • I’m busy and I read a lot of investment letters, I don’t have time to reread investment letters in an effort to understand what the manager is really trying to tell me. I want a straightforward letter that I only have to read once to understand.
  • You must write to the level of the average individual, not at a level that will impress your peers. Your clients would not be working with you if they did not believe you are intelligent…you don’t have to show them how intelligent you are by spewing out words that fly over their heads. If you want personalized and relevant letters, you must bring yourself to their level.
  • I try to speak in my natural voice, rather than a “writing” voice. I also find that humor and self-deprecation (on non-professional issues) resonate with clients.

Thank you, CFA Institute LinkedIn Group members and other respondents!

I am very grateful to all of the people who responded. Your comments made this topic come alive. I wish I could have included more of them.

I believe most of the survey respondents are financial or marketing professionals, but I didn’t collect their demographics. However, I suspect that members of two of my LinkedIn Groups–CFA Institute Members and Financial Writing/Marketing Communications–were particularly generous with their contributions.

 

Note: This post originally appeared in 2021 and was edited on June 1, 2014, and June 18, 2024.

JUNE NEWSLETTER: Edit your quarterly commentary using this process!

Do you want your quarterly commentary to shine? Polish it using the process that I describe in “5 steps for rewriting your investment commentary.” This is how I edit my clients’ work.

The main idea is to start editing at the big picture level and then work down to more specific elements of your commentary. This saves you from spending a lot of time on information that ultimately gets cut from your piece.

You can learn a lot more about the specifics of my writing process in Financial Blogging: How to Write Powerful Posts That Attract Clients.

Get Google’s help removing your personal data from the internet

Google’s “Results about you” tool can help you remove some of your personal information from the internet. I tried it and got some information removed.

Learn more from “Why You Should Google Your Own Name Today” by Zak Doffman on Forbes.

Keyboarding on the go

picture of a black logitech keyboardPeople always comment when I use this compact multi-device wireless keyboard from Logitech to take notes on my phone at conferences. I love its cradle to hold my phone upright so I can follow along as I type.

You can use this keyboard with three different devices. Simply turn the dial to select the device that you’ve connected earlier via Bluetooth.

I use this keyboard almost daily with my personal computer because I like its narrow width. The batteries last a very long time.

Pumpkin pie smoothie

I like smoothies. My standard is a smoothie made with banana, peanut butter powder, and milk.

However, sometimes I go a little wild. Like when I made the KaleJunkie.com’s tasty smoothie recipe described in “My Favorite Pumpkin Pie Smoothie.” I also enjoyed her “Pumpkin Pie Overnight Oats.”

Hellebores

I love hellebores, one of the first plants to flower in the spring. But I’m frustrated by how their heads hang down, concealing their beauty.  That’s why I sometimes cut off some flowers and float them in a bowl, as you see in my photo.

 

 

 


What my clients say about me

“Fast, effective, insightful. I can think of no better resource for superior financial writing.”

“Susan has an exceptional ability to tailor investment communications to the sophistication level of any audience. She has an uncanny ability to make very complex investment and/or economic topics accessible and understandable to anyone.”

“Susan’s particularly good at working through highly technical material very quickly. That’s very important in this business. A lot of people are good writers, but they have an extensive learning curve for something they’re unfamiliar with. Susan was able to jump very quickly into technical material.”

Read more testimonials!


Improve your investment commentary

Attract more clients, prospects, and referral sources by improving your investment commentary with 44 pages of the best tips from the InvestmentWriting.com blog.

Tips include how to organize your thoughts, edit for the “big picture,” edit line by line, and get more mileage out of your commentary.

Available in PDF format for only $9.99. Email me to buy it now!


Boost your blogging now!

Financial Blogging: How to Write Powerful Posts That Attract Clients is available for purchase as a PDF ($39) or a paperback ($49, affiliate link).

 

5 steps for rewriting your investment commentary

Investment commentary authors often know the markets well, but lack writing and editing expertise. After all, they’re earning big bucks to manage money, not to write.

I’ve learned some lessons about how to edit investment commentary that I share below with you. The lessons are based on my years of experience editing and writing  commentary for a diverse group of clients.

5 steps for rewriting your investment commentary inforgraphic

Step 1. Analyze overall structure

Before you dig into the details of your commentary, look at its overall structure. Your analysis may lead you to delete or move entire sections to make the structure more reader-friendly.

First, identify the main themes of your commentary. You may decide after a quick reading that your themes are something like the following:

  1. This was a volatile quarter, due mainly to disappointing corporate earnings and instability in the Middle East.
  2. Corporate earnings are likely to recover for three reasons.
  3. Instability in the Middle East will continue, and here’s how it affects our investing.
  4. Here’s why these six stocks are the portfolio’s biggest winners or losers for the quarter.

If a simple read-through doesn’t identify your main themes, you can try mind mapping your commentary’s content. I sometimes use mapping when editing complex client documents. Mapping gives me a bird’s eye perspective that helps me spot clusters of ideas that form themes. For more on mapping, please see my book Financial Blogging: How to Write Powerful Posts That Attract Clients.

Once you’ve identified the themes, delete any paragraphs that aren’t relevant. Also, move your paragraphs so your argument builds in a logical order.

Step 2. Provide guideposts for your readers

Once you’ve identified your commentary’s themes, you can make it easy for your readers to absorb them. Three key tools are your title, introduction, and headings. Each of these components should manage your readers’ expectations.

Titles should communicate your main topic. Simply writing “Third Quarter Review” isn’t enough. It doesn’t distinguish this quarter’s review from all that preceded it. Nor does it distinguish your review from those of your competitors. At a minimum, name your main topic in your subject line. For example, “Third Quarter Rocked by Earnings and Middle East Conflict.”

As for your introduction, I believe it should say exactly what you’ll cover. This lets your readers quickly assess whether your commentary interests them.

Next, use your headings as milestones for your commentary. Express your opinion or conclusion, if possible. For example, instead of using “corporate earnings” as your heading, consider something like “corporate earnings disappoint, but rebound likely.”

Step 3. Work within paragraphs

Once you’ve completed your “big picture” edits, dig into your individual paragraphs. Strong topic sentences will ensure that today’s busy readers can skim what you read, using their quick scan to zero in on the content that most interests them.

A strong topic sentence covers the paragraph’s main point. Everything that follows in a specific paragraph should relate to the topic sentence. If not, then cut it. This isn’t the only correct way to write, but it’s the best way to write for online readers and readers suffering from information overload.

For more on this topic, read my blog post about the first-sentence check.

Step 4. Examine your individual sentences

The next step is to make what professionals call “line edits.” This means correcting and improving your sentences for grammar, punctuation, vocabulary choices, and other issues in your writing style.

Working down to small items from “big picture” items is efficient. It means that you don’t waste time improving your word choices in a sentence or paragraph that you ultimately cut from your draft.

Step 5. Proofread and check statistics

Once you’ve completed your editing, it’s time to proofread. I’ve blogged in “5 proofreading tips for quarterly investment reports” about my best proofreading tips. Also, check the accuracy of your statistics, such as index returns. If possible, get someone else to proofread your work. After you’ve lived with a document for a while, it becomes hard to spot errors that would smack you in the face on a first reading.

 

 

If you follow these five steps, you’ll attract more readers. That’s your goal, right?

 

 

 

Note: I edited this on Sept. 30, 2022, and April 8, 2025.

NOV. newsletter: Keep your investment commentary fresh!

How do you keep your investment commentary fresh?

Having wrapped up another quarter’s investment commentary, you might be wondering how you can keep your commentary interesting, quarter after quarter. This is especially tough for long-term investors who don’t chase the latest trends.

In my blog post, “Investment commentary – How do you keep it fresh?” I share two techniques:

  1. Express an opinion.
  2. Highlight what’s new in an old theme.

Read more at “Investment commentary – How do you keep it fresh?”

Prevent LinkedIn AI from using your content

Generative artificial intelligence (AI) harvests content from across the internet to make itself smarter. LinkedIn revealed earlier this fall that it is using your LinkedIn content to train its AI.

If you don’t want LinkedIn to do that, follow the instructions in “LinkedIn is using your data to train AI. Here’s how to turn it off.” from Mashable.

Memorialize a LinkedIn account

It’s a strange feeling when a LinkedIn search brings up the profile of a friend who has died. It’s even worse when that profile appears active, with no indication that the person is no longer living.

Did you know that it’s possible to close or “memorialize” the LinkedIn account of a dead person? A memorialized account includes a prominent label saying, “In remembrance.” You’ll find instructions at “Memorialize or close the account of a deceased member.”

Enjoy discounted shipping

Thinking about buying and shipping holiday gifts? You’ll pay cheaper rates on USPS and UPS shipping with a free account from Pirate Ship. Using Pirate Ship, I recently saved 20% on mailing a copy of my Financial Blogging book to a buyer. I’ve used Pirate Ship to buy mailing labels to send to people across the U.S. and Canada.

Just create a free account and enter the recipient’s mailing address to find the cheapest or fastest option for your package. Then buy and print a label for your package. You can track your package using the information provided by Pirate Ship. It’s easy!

I don’t have any financial incentive to recommend this to you.

However, if you’d like to give a printed copy of my Financial Blogging book as a holiday gift, email me your shipping address to learn how you can snare one of my remaining copies of Financial Blogging: How to Write Powerful Posts That Attract Clients for only $27 (regularly $49), including shipping within the U.S.

Help your memory

“The best activities for your memory are reading, visiting friends or relatives, going to the movies or restaurants, or walking and going on excursions. It is also cumulative: The more activities, the merrier you will be,” says Barbara Bradley Hagerty in Life Reimagined: The Science, Art, and Opportunity of Midlife.

That’s a lovely prescription for better health.

Halloween pumpkins in Chatham, Mass.picture of a pumpkin baker wearing a white chef hat and plaid trousers

I enjoyed a cute display of pumpkin figures in Chatham, Mass. It appears to be an annual event that starts in mid-October. Check it out if you’re nearby!

 

 

 

 

 


What my clients say about me

“Fast, effective, insightful. I can think of no better resource for superior financial writing.”

“Susan has an exceptional ability to tailor investment communications to the sophistication level of any audience. She has an uncanny ability to make very complex investment and/or economic topics accessible and understandable to anyone.”

“Susan’s particularly good at working through highly technical material very quickly. That’s very important in this business. A lot of people are good writers, but they have an extensive learning curve for something they’re unfamiliar with. Susan was able to jump very quickly into technical material.”

Read more testimonials!


Improve your investment commentary

Attract more clients, prospects, and referral sources by improving your investment commentary with 44 pages of the best tips from the InvestmentWriting.com blog.

Tips include how to organize your thoughts, edit for the “big picture,” edit line by line, and get more mileage out of your commentary.

Available in PDF format for only $9.99. Email me to buy it now!


Boost your blogging now!

Financial Blogging: How to Write Powerful Posts That Attract Clients is available for purchase as a PDF ($39) or a paperback ($49, affiliate link).


Hire Susan to speak

Could members of your organization benefit from learning to write better? Hire Susan to present on “How to Write Investment Commentary People Will Read,” “Writing Effective Emails,” or a topic customized for your company.

Portfolio performance commentary’s basic components

Commentary about portfolio performance is part of every investment manager’s communications. The depth and breadth of commentary varies widely. It can consist of a single line giving portfolio returns. Or, it can be a multi-page report full of charts, graphs, and details. The longest reports typically target institutional clients—not individuals.

In this article, I review portfolio performance reports’ common components.

Portfolio performance commentary's basic components infographic

 

1. Portfolio returns

Your portfolio’s results for at least one period are the sole essential element of portfolio performance reports. Portfolio returns are typically compared with the returns of one or more benchmarks to provide perspective on how the portfolio performed relative to its goals, investable universe, or peers. For mutual funds or ETFs, the main benchmark is specified in its prospectus. For separately managed accounts, the benchmark may be specified in the investment policy statement.

Showing multiple benchmarks can provide perspective on performance. Say, for example, you run a small-cap stock fund in the space between growth and blend. Showing returns for the Russell 3000 Growth and for the plain-vanilla Russell 3000 indexes helps readers to understand the extent to which your portfolio’s less growth-oriented approach affected its performance.

Comparing your portfolios performance to its peers—say, Lipper Small-Cap Growth Funds if you run a mutual fund or its decile ranking in an applicable universe of institutional funds—also gives perspective. These comparisons may be more favorable than comparisons to indexes because these returns are measured net of expenses, unlike index returns, which have no expenses deducted. Peer groups may offer a more “real world” perspective on what managers can achieve.

Once you pick indexes for comparison, you must stick with them. You can’t decide, “we look good vs. Lipper this quarter, but bad vs. the S & P 500, so let’s only use Lipper this quarter.” The SEC doesn’t like that.

Similarly, you must be consistent in the periods of performance that you show. It’s a good idea to show more than one quarter of performance. You don’t want your clients to fixate on short-term performance. But once you start to show one-year, three-year, and since-inception returns, you must continue to show them.

2. Attribution analysis

Can you attribute the portfolio’s performance to specific characteristics? That’s the question that attribution analysis seeks to answer.

Attribution analysis is typically measured by numbers, typically percentages. For example, “2.5% of the overall return came from stocks in the financials sector.”

Attribution may be considered relative to a benchmark or independently of benchmarks. When it’s measured relative to a benchmark, a key question is: Why did the portfolio outperform, underperform, or perform in line with the benchmark? You’ll look at factors such as the contributions of security selection, sector weightings, asset allocation, and maybe even cash positions and the flows of money into and out of the portfolio.

You can try to discuss portfolio performance independently of benchmarks. However, you may need to break with that policy if your performance dramatically diverges from the benchmark. This is especially true when you underperform. Your benchmark-savvy clients will want to know why you underperformed.

Numbers don’t tell the entire story of what drove performance. That’s why, at a minimum, someone directly involved in managing a portfolio should review its attribution commentary before publication.

3. Stock or sector stories

Stories about specific securities or sectors can shed light on how active managers think. Stories about winners—and losers—show what the fund managers emphasize in their decisions. Discussions of winners typically show off the managers’ strengths. They also display the managers’ understanding of the larger environment for investments. For example, they may speak to themes, such as beneficiaries of lower commodity prices, that the managers favor. They may also reflect the managers’ market outlooks.

Stories can also illuminate the performance of index funds, to the extent that they demonstrate how the market moves.

To keep the SEC happy, you can’t focus solely on winners, especially if your portfolio underperformed. You must balance your discussion—typically by discussing at least an equal number of losers, although you may have some leeway in a period when losers are hard to find.

Losers pose an extra challenge to writers. Should you defend your holding, in addition to explaining its performance? I like the consistency of keeping the format the same for both winners and losers. Plus, if you’re confined by tight word count limits, you can’t fully explain and defend the losers.

However, defensive comments help if you’re writing commentary for use by your firm’s client service team. They’ll thank you for making their job easier when clients question your holdings. Still, if you don’t explicitly defend your losers, you can provide some context for their performance in your market recap or market outlook sections.

For more on how to discuss underperformance, see “Four lessons from Wasatch Funds on reporting underperformance.”

4. Market recap

A market recap discusses recent market performance. It may focus narrowly on the portfolio’s asset class or it may range more broadly to provide context.

For example, a market recap for a U.S. high yield bond fund might discuss Treasuries, investment-grade bonds, and riskier bonds to show how investors’ attitudes toward risk factored into the portfolio’s performance.

The goal of a market recap is to provide context for the portfolio’s performance. It may also provide insights into how the manager views markets.

5. Market outlook and portfolio positioning

Providing insights into the market’s future is the focus of the market outlook. Managers vary in their willingness to make predictions. Passive—also known as “evidence-based”—investment managers may shun predictions. However, for active managers, predictions help their investors to understand their portfolio positioning.

Comments on portfolio positioning complement market outlooks to the extent that the managers’ allocations to securities, sectors, and asset classes are driven by their market predictions. Of course, other factors affect positioning, such as the managers’ perception of long-term trends outside the markets—so-called secular themes—that will influence the performance of investments.

6. Top 10 holdings

Top 10 (or top five) holdings is a popular section on mutual fund fact sheets for the clues it offers into a fund’s composition, particularly when compared with its benchmark.

If you present to institutional clients, who tend to crave more detail than individual investors, you may write a brief description of your top holdings and why they’re in your portfolio.

7. Securities bought and sold

An asset manager’s buy-sell philosophy is important to investors as they evaluate placing their money with manager. Naturally, once they’re invested, they’d like to see how the manager implements that buy-sell philosophy.

Discussion of buys and sells isn’t part of every investment commentary. There simply isn’t room in some formats.

If you discuss your trades, don’t focus solely on your winners. As I said earlier, the SEC doesn’t like that. However, you can use objective criteria, such as every quarter discussing the three largest purchases and the three largest sales.

If you have enough room, give your readers a brief description of each company and why you bought or sold.

8. Graphs and charts

Some information is easier to absorb as a table, chart, or graph. Take advantage of these formats to help your readers. I particularly like graphs that show portfolio performance vs. a benchmark.

What did I miss?

Did I cover everything that you see as essential to investment commentary? Please share your opinions and insights.

Note: This article was originally published on Oct. 13, 2015, and updated in June 2018, November 2022, and August 2023.

ESG opinions can enliven your commentary

ESG investing is hot. More and more individual and institutional investors are considering companies’ strength in terms of their environmental, social, and corporate governance characteristics. This is a topic you might want to discuss in your client communications.

Which Corporate ESG News Does the Market React To?” (membership required to view complete text) is a 2022 Financial Analysts Journal article that can spark some ideas for your commentary. The article suggests that investors respond to unexpected news and that “investors are motivated by financial rather than nonpecuniary motive as they differentiate in their reactions based on whether the news is likely to affect fundamentals.” Also, “This price reaction is larger for ESG news that is positive, receives more news coverage, and relates to social capital issues relative to natural or human capital issues.”

You can start your discussion by using the techniques I originally discussed in “Investment commentary topic: ETF controversy.” (See “3 ways you can use a Financial Analysts Journal article for investment commentary” image below.)

3 ways you can use a Financial Analysts Journal article for investment commentary

1. Discuss  whatever this article makes you think about

You can run with the questions suggested to you by the article. If you have opinions about ESG-related drivers of stock prices, share ’em.

Or, use the article to spur your discussion of ESG-related issues that don’t necessarily relate to stock prices. Perhaps you think it’s far more important to look at the impact of your stock choices on ESG-related corporate activities and social justice than to understand what moves stock prices. It’s helpful for your clients and prospects to know if you think, “Who cares what drives stock prices? We need to save the world.”

2. Discuss why the article is right about ESG investing

You can go deeper than the article, or you can explain how it applies to the investments your firm uses.

If you’ve observed the phenomena discussed in the article in specific stocks or industries, that makes for an interesting story that gives insights into your approach to investing. Of course, make sure your firm’s compliance professionals approve (and provide appropriate disclosures) for any discussion of specific stocks. Also, don’t cherry-pick only positive examples of your firm’s analysis (or use appropriate disclosures if you only discuss positive examples).

If your firm invests in funds that are adept at using positive ESG-related news in their stock selection, that’s another good topic for your client communications.

3. Disagree with the article

If you discover flaws in the authors’ arguments, identify those flaws and say why they should matter to your clients.

Your ability to evaluate information critically is important to your clients. That’s especially true when you tie your analysis to its impact on your clients’ WIIFM (what’s in it for me).

Credit your source for this ESG topic

You must credit the Financial Analysts Journal article as your source. That’s especially true if you cite data from it. But mention it even if it was merely the article title that sparked your ideas. Your clients and prospects like to know that you read reputable sources of research to stay up on investing.

 

 

 

Nice analogy about large caps vs. small caps

I like this analogy from “A Rough Ride on the Risk Curve” from The Wall Street Journal:

“Because of their deep balance sheets and diversified businesses, large caps can often ride out storms like cruise liners, while small caps are tossed about like sailboats.”

A powerful analogy can persuade your audience when dry, rational arguments fail.

On the other hand, a bad analogy can send your reader astray. That’s what happened to me with a “lollipop” hike.

Note: these analogies are from some years ago, but they’re still powerful. The cruise liner analogy appeared in The Wall Street Journal on Nov. 26, 2007.

Investment commentary topic: ETF controversy

Are you tired of only discussing recent market developments in your investment commentary? Look to your professional reading for ideas, as I suggest in my webinar, “How to Write Investment Commentary People Will Read.” A topic leaped out at me when I read the CFA Institute’s Financial Analysts Journal (FAJ) from 2021’s first quarter.

The title of “Levered and Inverse Exchange-Trade Products: Blessing or Curse?” (summary available, but subscription required to read the entire article) lays out the topic clearly. The authors say in their summary: “levered and inverse products are not, and cannot be, effective investment management tools.”

If this is a topic that interests you, as well as your clients and prospects, there are several approaches you can take.

3 ways you can use a Financial Analysts Journal article for investment commentary

Approach #1. Run with the topic on your own.

If you know this topic well, you may be able to opine at length off the top of your head. Go for it, if that’s what your clients expect and enjoy. The FAJ article has served its purpose if it only identifies a new topic for you.

A variation on this approach is to simply explain what levered and inverse ETFs are. If you’re writing for an audience of retail investors, they may never have heard of them or may not understand what they are. They’ll need a plain-English explanation. Of course, before you dig into the details, explain why your readers should care that these funds exist.

Approach #2. Use this article to bolster your case against these ETFs.

The authors discuss how “the most important problem with geared (levered) and inverse funds is that most of them are expected to collapse.” As part of this, they review these ETFs’ history and performance. There’s likely to be some information you can use to make your case against these ETFs.

The degree of detail that you go into will depend on your audience. Sophisticated institutional investors will understand (and be interested in) more details and technical information than your typical retail investor.

When you quote—or use statistics from—this FAJ article, refer to it as the source. That’s only fair. Plus, mentioning a reputable source like the FAJ will enhance your credibility.

I explain one approach to this kind of article in “Financial blogging tip: opinion + summary.”

Approach #3. Argue against the article’s conclusion.

If you think the article’s conclusion is wrong, say why. Is there a big hole in the authors’ arguments? Or perhaps you think the authors too quickly dismiss these ETFs’ value as what even they admit is “an inexpensive, convenient, highly levered, and limited-liability means for profiting from a directional price view.”

If your firm isn’t a creator of such ETFs, visit the websites of the creator firms. They’re bound to have helpful information.

If you disagree with the article, you may not want to refer to the article in your commentary. However, if your clients have read the article, mentioning it shows that you don’t ignore all information that disagrees with you. That’s good. You can also rebut specific points, while referring to areas where you agree.

Bonus investment commentary topics

Two of the other articles in this issue of the FAJ also struck me as potential sparks for your investment commentary:

  • Should Mutual Fund Investors Time Volatility?” —Volatility is a timely topic. You don’t necessarily need to go into the details of the authors’ thesis. You can see where the topic takes you.
  • Reports of Value’s Death May Be Greatly Exaggerated”—This is a topic close to the hearts of value investors who’ve been suffering for years as growth has outperformed. You may not agree with the take of Research Affiliates’ Rob Arnott and his coauthors. However, they raise questions worth considering. For example:
    • “Was value merely lucky in the past, or is it now arbitraged away by its own popularity?”
    • “Have structural changes in the economy made the value factor newly irrelevant?”
    • “What to expect from value?”

The FAJ’s other two articles could serve as fodder for some commentary, but their appeal is more limited. This blog post discusses the three articles that I think have the broadest possible appeal.

YOUR ideas?

Have you read something that could spur interesting investment commentary? Please comment.

Prepare clients for market volatility

Prepare your clients for the fact that their portfolios will experience periods of disappointing performance. I often share this advice in my presentations on “How to Write Investment Commentary People Will Read,” but I’m always seeking more specifics on how to do this. At the NAPFA Spring 2019 Conference, I picked up practical ideas for how financial advisors can achieve this.

Financial plan as source of certainty

In “Improving Investor Behavior Through Behavior Coaching,” Jay Mooreland of the Behavioral Finance Network touched briefly on how financial advisors can prepare investors for volatility. He suggested focusing on the financial plan as a source of certainty.

Talk less about performance, and more about the plan, he urged the audience. “Remind them that your plan accounts for this volatility,” he said. After all, as he said, we can’t control market volatility, the economy, or politics. We can, however, control our investment strategy and our behavior and our reactions. In fact, you can coach clients to view volatility as their friend. That’s because it gives people an opportunity to “buy low.”

Pre-commitment plan

Mooreland suggested creating a “pre-commitment plan.” Tell your clients you understand that it’s difficult to buy during volatility. That’s why you have clients commit in advance that if the market falls X%, they’ll move Y% into stocks. You can make plans for multiple levels of market declines. “From a behavioral standpoint, it can be powerful,” said Mooreland.

Mooreland also showed two market performance graphs that reinforced why investors shouldn’t let short-term volatility upset them. If you fell asleep on September 1, 2018, and woke up on Easter Sunday, 2019, the market would be at roughly the same level. That investor wouldn’t have experienced volatility.

The perception of volatility is a function of how often you look at the market, said Mooreland. The more often you look, the more often you’ll see what is ultimately a good investment look bad.

Use your communications to reduce the volatility and stress that your clients feel. Both you and your clients will benefit.

Avoid guarantees

Of course, don’t promise that the financial plan will protect clients from harm in any scenario. You know how the SEC feels about guarantees. Still, there’s plenty that you can do within the constraints imposed by the regulators.

Can “find and replace” prevent quarterly commentary errors?

Most people who write quarterly commentary struggle a bit with errors and typos. I wrote about some of my struggles (and solutions) in “Investment commentary numbers: How to get them right.” As I mentioned in that post, I once made a bad mistake, naming the wrong quarter in my employer’s quarterly commentary. That post prompted a reader to email me with his solution for commentary errors.

Find-and-replace solution

My reader starts his quarterly report by copying and pasting the previous quarter’s report. After updating the numbers, he uses his word processor’s find-and-replace function to update the name of the quarter. For example, he searches for “third quarter,” and then has the software replace it with “fourth quarter.”

This is a great solution for a short, structured quarterly report. In this case, the name of the recently ended quarter will always fall in the same place. This means the find-and-replace solution should function perfectly.

Use caution

If you write a more open-ended quarterly report, you should use the find-and-replace solution cautiously. Why? Because your text for the current quarter may also refer to significant events of the previous quarter.

Using auto-replace to substitute, for example, “fourth quarter” for “third quarter” could result in a sentence like the following: “Unlike in the fourth quarter, small-cap stocks performed well in the fourth quarter.” Oops! You don’t want that to happen.

To catch that kind of error, reading the text out loud is probably the most effective technique.

Your suggestions for catching commentary errors?

I always learn from your comments and suggestions. Please keep sending them to me.