Long-term investing is back in the news and increasingly on fund management groups’ public agendas.
Attempts to promote its benefits include Newton Investment Management’s announcement of a five-year partnership with Cambridge University’s Centre for Endowment Asset Management and moves by Dominic Rossi – Fidelity’s global chief investment officer for equities – to encourage underlying businesses to instigate genuine long-term incentives for staff.
Newton chief executive Helena Morrisey, a long-term supporter of long-term investing, says the aim of the collaboration with Cambridge is to help investors make appropriate decisions and to understand their impact on returns.
So, what moves are investment groups making to create a long-term investing environment in their businesses?
Didier Saint-Georges, a member of the investment committee at Carmignac, says: “The rule is to look for companies that are very well managed, ideally by management teams that have ‘skin in the game’, and have a competitive advantage in an underpenetrated and therefore growing market.
“Such investments are the ones that can make a huge difference over time. All other investments are exceptions to the rule.”
Nick Mustoe, chief investment officer at Invesco Perpetual, believes valuation is crucial and says his fund managers take a long-term approach to building portfolios, where each holding has the potential to deliver absolute upside.
“Taking a three or five-year view means our funds have benefited from the conviction-led investment style which our fund managers consistently employ,” he says.
“As bottom-up stockpickers, this frequently involves taking contrarian positions in stocks which we believe are fundamentally strong businesses, but which are out of favour with the market.
“Our fund managers are happy to wait. All investments are undertaken with an expectation that they will be held until they are no longer valuation anomalies, or a compelling new idea creates an opportunity cost to holding them.”
Not every investor is so sure, however. As Mr Saint-Georges points out, behavioural finance shows that human beings are highly averse to volatility – which is why, typically, they are prepared to invest for the long term in real estate but not in financial markets.
“Real estate gives them the illusion of price stability, whereas the transparency and daily valuation of financial investments bombard them with the torture of price movements. When the pain becomes too intense, they cut their positions and relinquish all the benefits of a long-term perspective,” he says.
Mr Mustoe agrees that the key is for fund managers to ignore the pressures that come from benchmark indices and peer-group returns and to resist the move towards short-termism and closet indexation within the broader industry.
“The tendency towards herd investing – buying the market and doing what everyone else is doing – does not apply exclusively to either professional investors or end clients,” he explains.
“Most investors place greater emphasis on negative returns than positive returns. In short, investors fear a loss more than they celebrate a gain, and it is this emotional response to short-term events which needs to be held in check.”
But is long-term investing really better? According to Mr Saint-Georges, experience shows that the risk/return ratio of short-term investing is highly questionable. Long-term investing, on the other hand, is about having strong convictions and digging deep, before others have done the hard work, to unearth rare examples of market inefficiencies.
Mr Mustoe believes that at the company level, patient long-term investing – working with company management on issues that relate to performance and sustainability – helps firms to grow and to succeed at what they do. The benefit for investors comes from avoiding knee-jerk reactions.
He says that long-term investing also encourages lower stock turnover and long holding periods, which he believes are key to providing clients with long-term outperformance versus benchmark indices and peers.
For Invesco Perpetual’s onshore ICVCs, (excluding balanced risk and multi-asset funds), portfolio turnover was 28 per cent in the 12 months to the end of September 2014, which translates to an average four-year holding period.
“Our biggest proof statement that we take the long view is in the following stock examples, which we have held for some 10 years within the Invesco Perpetual UK Strategic Income fund: BT Group, BAT, Imperial Tobacco, GlaxoSmithKline, SSE, BAE and Centrica, among a number of others,” adds Mr Mustoe.
Mr Saint-Georges says that in normal years, most of Carmignac’s active funds run turnover rates in the region of 20 per cent, which means that, on average, stocks are held for five years.
Cole Smead, portfolio manager at Seattle-based Smead Capital Management, says: “The heart and the soul of the problem is people’s unwillingness to invest time.” In the past five years, his large-cap equity fund has had portfolio turnover of only 13 per cent.
He is convinced that businesses in certain sectors, such as banking and tobacco are growing steadily more successful with the passage of time. With tougher regulation, there is little in the way of new competition.
“It is the way Philip Morris International has done so well,” he says. “Its customers stick with it.”
