Welcome to the sixth in a series of articles offering insights and tips to prepare money management firms for improving their abilities to out-market competitors and attract assets from sophisticated investors in the coming post-pandemic, recessionary world.
For What It’s Worth
For a great many companies, both public and private, as well as for the assets behind asset-backed lending investments, the intrinsic valuations these investments had prior to the pandemic and recession are no longer relevant, let alone accurate; despite the market being up.
Over the summer, sophisticated investors such as family offices began re-evaluating their direct investment holdings to determine where and how risk/return exposures changed. They are calculating which holdings now have lower upside potential in this pandemic and global recessionary world. They are calculating which holdings now have higher risk than what they previously bargained for, and are beginning to think what they want to do about it. They are looking to determine which investments have fallen into the write-off territory. Many of the direct holdings in their portfolios are likely to have valuation adjustments made to them.
This has significant ramifications for every portfolio manager vying for a new allocation from sophisticated investors, because it will be resulting in more probing due diligence vetting by family offices, endowments, foundations, institutional plan sponsors and their consultant gatekeepers.
However, in my talks with a wide range of portfolio managers over the summer there were valuation-related questions I found that they were not prepared to answer. In their asset raising efforts they will find they will have to.
What Are Your Investment Firm’s Changed Valuation Views?
Here are some of the key questions your money management firm must be prepared to address when explaining your strategy to a new prospect, as well as when updating with existing investors.
1. For positions you held pre-Covid, how have you re-examined the previous valuations you gave them?
2. For positions where your re-valuations show increased risk or reduced upside what actions have or do you plan to take, and why?
3. How have you modified position sizing and asset allocation, and why?
4. For new positions you are researching and considering adding to your portfolio are you using your same unchanged thinking from the pre-pandemic, pre-global recessionary environment? Why or why not? (If you claim you have no need to make any tactical adjustments to running your strategy, and you are not running a momentum investing strategy that acts ‘blind’ to valuations, watch out.)
5. Many investors believe that the coming years will likely see more extreme non-company specific risk factors affecting holdings, and this will impact valuations and portfolio investment decisions. What insights is your firm applying to its investment management approach to mitigate risk exposures while pursuing alpha?
Sophisticated investors expect portfolio managers to recognize that just because the market is currently up, and global recessionary factors have yet to have their full impact, it doesn’t mean this is a business as usual investment environment, particularly when it comes to the three-to eight-year outlook ahead (less than the lock-up time for PE investments).
Portfolio managers who cannot address the valuations topic in detail may leave the impression that they give less thought and attention to their basket of holdings than do the institutional investors they are pitching, who already put in the time and effort to conduct updated due diligence analysis on their direct holdings to determine where their views on valuation changed and what they plan to do about it.
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