Every investor knows they should buy low and sell high but it is far from clear if all investment ho...
Every investor knows they should buy low and sell high but it is far from clear if all investment houses put this maxim into practice. Commercial pressures often come into play and these can have a detrimental effect on investors, leading to a buy high and sell low approach, which most agree is not the best way to make money.
There is an inherent tension in every fund house between the fact it is a business looking for assets and revenues, giving it a short-termist outlook, and its core competency, which is generating strong long-term returns in its portfolios.
On the face of it the two elements should compliment each other. In reality they seldom do so. Fund groups tend to sell a product that has already built up a track record and all too often that means investors are getting in at the height of the market. Can you think of the last time a fund group suggested you take a look at technology funds? It is now five years since the crash, companies are beginning to increase capex spend and there are some genuinely interesting new ideas coming to the market but few are pushing this asset class.
The second problem is that fund managers are not always immune to business pressures. A manager has to be very senior indeed before they can take a stance that leads to short or even medium-term underperformance against the peer group. This was the case with Neil Woodford of Perpetual during the late 1990s when he refused to play in TMT stocks. But can you think of a junior manager in any group who would be given the same latitude? As a rule of thumb the more junior the fund manager, the more likely their bosses to tell them the market is right and they are wrong.
A third area where commercial pressures come into play is in how well resourced portfolios are with talent. This is a decade in which boutiques are seen as heroes and large fund groups as villains. Boutiques are certainly better able to marry up their long-term portfolio and shorter-term commercial interests because they depend on star managers, but not all large fund groups are value destroyers.
Groups that rely on distribution and brand can afford not to spend money on fund manager talent as the money is going to roll in regardless. But large groups do have the ability to buy in decent resource as and when it is needed. Besides boutiques are not a one-way bet. As they become larger they become the next generation of medium-sized players in the market, at that point they will face some far tougher commercial and organisational issues than ever before.
The danger for investors is that the tougher business environment has an impact on the fund performance. As all good investors know, timing is everything and understanding exactly what timescale a fund manager is operating on is a vital consideration for advisers.
Fund manager independence from business pressures and the dilemma of when to buy into asset classes are areas are two of the topics covered in this year's International Investment Channel Islands Forum.
Mark Colegate, group editor, International Investment
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