OpinionNov 23 2015

In defence of short-term performance figures

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In the eyes of many in the investment industry, there’s little worse than being considered short-termist. But I’d argue that the onus is on fund selectors to be just that right now.

Buyers’ distaste for this kind of analysis is best reflected in the way fund managers present themselves: the phrase ‘long-term time horizon’ is a staple of every piece of marketing literature, securities that are quickly bought and sold are glossed over, and ‘short-term noise’ is always ‘looked through’.

At the same time, we are constantly told that short-termism is becoming a more pervasive issue – among market participants, among portfolio managers keen to be seen to ‘do something’ by rebalancing, and, yes, among the financial press.

These trends may be forcing managers to rethink their focus, however much they claim otherwise.

As the Kay Review put it back in 2012, the shorter the timescale on which asset manager performance is judged, and the slower prices are to respond to changes in “fundamentals”, the greater the motivation for a manager to focus on the behaviour of other investors rather than these fundamentals.

The implications of this are obvious – herd behaviour and increased volatility – and they don’t bode well for investment markets’ ability to function healthily.

Who will prosper when markets go into reverse? We’ve had precious little indication over the past few years Dan Jones

Nonetheless, I think there’s an increasingly strong argument that advisers and other fund selectors need to take a closer look at short-term performance.

This isn’t a comfortable position. Aside from the aforementioned pressure it may be placing on managers, it also conflicts with many of the principles behind providing good investment advice.

I’d counter that fund buyers have little choice at the moment, however – and it’s the strong returns of recent years that are to blame for this.

We’re now almost seven years on from the developed equity market bottom of early 2009. A manager in this area who began running money in that year will likely have enjoyed considerable success.

But which of these managers will prosper when markets go into reverse? We’ve had precious little indication over the past few years: when developed market stocks have fallen, they’ve tended to shoot back up again in short order.

The only thing to do, in this scenario, is to look at these brief drops for clues. It’s far from an ideal situation, but I suspect managers’ performances during blips such as this August are being scrutinised far more closely than they would have been in equivalent periods pre-2008.