Investors are told to buy and hold, keep invested for the long term and only make changes when absolutely necessary. But this isn’t happening.
Earlier this month, data from Calastone showed that investors’ overall holding period for a fund has collapsed. On average, investors tend to hold equity and bond funds for four years, down from seven and eight years respectively in 2016.
The latest figures remind me of a conversation I had several years ago with former fund manager John Bennett, who headed Henderson European Focus Trust at the time but left to become the chair of Glasgow Rangers football club.
Often honest and outspoken, when discussing a one-year period of underperformance he told journalists if he had not turned things around within 12 months his shareholders should sell the trust and find somewhere else to put their money.
Afterwards, when asked if it was typical for fund managers to be given the benefit of the doubt and investors to take a long-term view, he scoffed.
“Short-term performance is important. That is just the reality of a fund manager’s lot. A 10-year view – oh my, if only. I actually think three is the number,” he said, suggesting investors tended to only think in the short-to-medium term.
If timeframes have got even shorter, some well-known managers may well be feeling the same way. Take Terry Smith and Nick Train, for example. Both have suffered outflows in recent years despite phenomenal long-term track records as short and medium-term performance has been middling at best. Both have failed to beat the average peer over and five years.
So are investors selling too soon and becoming short-termist? Speak to most investment professionals and the answer will likely be ‘yes’. Ernst Knacke, head of research at Shard Capital, said the biggest destroyer of capital in the investment industry isn’t active managers’ fees (as is sometimes claimed) but asset allocators switching out of funds that have recently underperformed into those with stellar short term track records. This equates to selling low and buying high, he said.
But I disagree, to an extent.
Using Train and Smith as examples, both are phenomenal quality-growth investors who made a lot of money for investors during the 2010s when interest rates were on the floor and defensive ‘bond-proxy’-type stocks were all the rage among bond investors who were being pushed into riskier assets such as equities. As a result, the quality-growth style shone.
Both communicated what they do and how they do it exceptionally well in the good times and bad. This is in no way a reflection of their ability as fund managers (or management groups).
Instead it is a problem with the investment industry as a whole. If managers are going to myopically stick to one investment style – which they have every right to do – investors have every right to sell as soon as they believe the market has turned away from the style the fund invests in.
For example, neither Smith nor Train have significant exposures to the Magnificent Seven stocks that have dominated the past few years, as not all fit their investment criteria.
That is fine, for them, as undoubtedly their investment styles will come back into favour at some point. But it means investors waiting for this turnaround could lose out on a lot of money in the meantime (relatively speaking) by owning their funds instead of a US tracker or, indeed, a different global active manager who owned a lot of these stocks and was quicker off the mark to jump on the AI bandwagon at the right time.
Investors who remained with Lindsell Train and Fundsmith for the past five years have missed out already.
Having shorter holding periods has become more important in today’s world when the market is getting choppier. What works one year may not do so in the next. The top performers of 2021 were hammered in 2022 as interest rates rose across the world, for example.
By sticking with an investment style, fund managers accept there will be times when they are in favour and with the market, and times when it is against them, but should investors diligently follow?
This is not an article advocating excessive trading, but I completely understand why people make the decision to sell out of a fund when it is not working and move elsewhere.
If fund managers want investors to stick with them through thick and thin, perhaps they should consider whether they are doing enough from a tactical perspective to protect and grow investors’ money – rather than leaving the asset allocation completely down to the individual.