As the trend towards short-termism among fund pickers grows, Simon Evan-Cook, manager on Premier's multi-asset funds, asks: should some investors be banned from buying active funds?
In the active versus passive debate, there are few more enthusiastic preachers of the benefits of good active management than us. But we have recently had cause to question our faith. This theological wobble is nothing to do with the actions of active managers.
Instead, our soul searching has been sparked by fund buyers. In this sense, we see parallels to the debate on dangerous dogs. The problem does not lie with the pit bulls – which are no more evil than poodles – but with irresponsible owners, whose reckless rearing turn dogs into weapons.
The trends are depressing. Our own experience suggests bulk fund buyers, such as discretionary managers and fund of funds, are becoming increasingly short- termist.
This is a damaging way to invest in funds.The very best fund managers will experience periods of underperformance, because they ignore the market’s short-term gyrations.
As such, there are certain parts of the investment cycle in which they excel and other parts when they do not. So, buying after outperformance simply increases the chances of underperformance. Similarly, selling after a poor run means missing out when they return to form.
This is the fund buyers’ equivalent of buying high and selling low, and they seem to be repeating their actions over and over again, each time expecting a better result. This is how Einstein defined madness. We have experienced this with several of our own holdings: outperforming funds suddenly grow exponentially on the back of a good run, only to rapidly deflate when performance reverses.
As an existing owner, the experience is like arriving at my favourite café only to find a coachload of tourists: standards will suffer as staff struggle to cope and I will be jostled when they rush for the door en masse. So, do I stick it out and hope the disruption is limited or go somewhere else and risk an inferior product? (This conundrum will be familiar to holders of certain emerging market funds.)
Why is this trend for bandwagoning growing? Recent developments in the discretionary market appear key. Advisers are increasingly outsourcing to discretionary firms who, for cost and regulatory reasons, are homogenising their client banks into model portfolios. All of this means there are fewer decision-makers controlling more assets.
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