Fund marketers are "shamelessly pandering to short-sighted investors." So claims Jonathan Clements in today’s Wall Street Journal (see "Advertised Hot Funds Can Burn Investors”). And his words are not entirely wrong. Nor are they entirely right. Fund marketers would be wise to learn to where Clements arguments fail and where they succeed.

Clements quite rightly points out that a number of fund firms relied on performance numbers to bolster sales during the bull run that ended eighteen months ago. Indeed, few rational observers of the fund industry would disagree with the contention that the fund industry in its entirety has relied on juiced returns from the nineties to sell its wares. So far as it goes, Clements argument serves as a fair warning to fund shareholders, but it stops a step short in assisting fund marketers.

For the sharp-eyed readers of the article, Clements examples provide a second, subtler lesson than the one he uncovers for his reader the fund shareholder.

He cites two motivations for fund marketers: “Either the marketing folks really believe that the best investment strategy is to chase hot funds or, alternatively, they are shamelessly pandering to short-sighted investors. Neither explanation is especially flattering.”

The article cites a number of advertisements, all undoubtedly familiar if only in spirit if not in exact detail to back this claim. In each case, fund firms boast of outsized returns, only to be unable to repeat the performance in the following period.

Some of the names of the firms on Clement roll call may also be familiar as the highest flying of the high flyers of the recently departed bull market -- Kinetics Funds, Invesco, and Janus. To show that even firm’s whose names are not associated with go-go investing, Clements manages to work in Neuberger Berman’s ads trumpeting its Millennium Fund.

Don’t dismiss Clements just because he takes an editorial lay-up at the expense of fund marketers, there is a useful lesson in what he says, and in which firm’s he fails to mention.

It is a truism that performance sells funds. What is forgotten is that sales is not marketing. Just ask Vanguard, one of the top selling fund firms in both the bull and the bear market environments about the difference.

Great performance is an opportunity to grab the attention of new shareholders. It also marks the opportunity to start, not end, the marketing process. When fund marketers have the attention of shareholders they need to use that opportunity to tell a larger story about what they offer shareholders. Clements does not discuss this, but it should be the larger point for those in the industry.

Vanguard has used this lesson well. Of course, when a Vanguard fund’s performance tops the tables its ads will include the numbers, but selling performance is not the goal of the marketing campaign. Vanguard’s campaign is always about frugal investing, whether in sunny markets or rainy ones, for active funds or passive funds, for equity funds or fixed-income funds. In all environments the marketing message is the same.

The lesson fund marketers must learn is that brands and reputation are built over time, in good markets and bad. Performance does sell funds, but it cannot be the soul inside the pitch even if it is the flesh that attracts the shareholder. Hang in there.  

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