Writing effective investor newsletters
Given the markets’ volatile start to the new year, clear communication with current and prospective clients is more important than ever. In particular, an effective investor newsletter can strengthen existing relationships and aid in attracting new capital.
Cover the basics
Central to the newsletter is a recap of the portfolio’s performance. “Performance is ultimately one of the single most important things that all of us face when managing money,” said Joshua Litwack, CFA, a portfolio and risk analytics product specialist for Bloomberg LP in San Francisco.
Compare performance to an appropriate benchmark. In some cases, such as for multi-asset portfolios, it may make sense to create a custom-built benchmark rather than use a widely followed market index. A single graph depicting the portfolio’s performance, overlaid against the index’s performance, can provide an easily understandable visualization of this information. The portfolio’s return in excess of its benchmark is considered its active return.
Some clients may also find data on risk or risk versus return useful. Statistics such as the portfolio standard deviation, Sharpe ratio and Jensen alpha can be helpful in quantifying how risk is impacting the portfolio return. However, if incorporating such numbers into a newsletter, consider also including a definition in layman’s terms.
Provide context
An effective newsletter will go beyond merely describing performance by analyzing its causes and the drivers of active return. Attribution is the primary manner of doing so. “Attribution aims at explaining where your portfolio return is coming from,” Litwack said.
Brinson-style attribution is one method of analysis widely used among registered investment advisers and institutional money managers. By explaining the allocation-and-selection effect, Brinton-style attribution can reveal, for example, whether a manager has outperformed by allocating to winning sectors or by choosing good stocks within those sectors. The results of Brinson-style attribution could be incorporated into a newsletter with a chart depicting the portfolio’s overweights and underweights in various sectors, relative to the benchmark.
Brinson-style attribution isn’t limited to sector-driven analysis. For an international portfolio, Brinston-style attribution might focus on allocation-and-selection among countries.
Craft a narrative
While data analysis is important, it is also crucial to construct a narrative around the portfolio’s performance. If Brinson-style attribution reveals that one stock or sector was the primary driver of outperformance, explain the elements that went into that winning investment decision. Be sure to also address any laggards in the portfolio.
Factor-based attribution can also aid in creating a narrative. This type of analysis can explain the portfolio’s exposure to factors such as growth or momentum, and how those exposures contributed to portfolio performance.
Finally, one additional type of analysis worth conducting is a trend analysis. A trend analysis will look at how a single metric, such as the portfolio’s price-to-earnings ratio, has changed over time. Broken down by sector or country, this type of analysis can assist in explaining the portfolio’s current positioning and how that’s changed over time.