An investor’s time horizon is an integral part of know-your-customer responsibilities, along with attitude to risk and other key determinants of the strategy that should be employed on behalf of a discretionary client.
A five-year investment horizon is commonly used as bare minimum for those investing in risk assets, taken these days to mean anything beyond cash. But over the past few years I have noticed a worrying trend, whereby this five-year horizon is cut drastically when assessing performance of the underlying holdings within client portfolios.
Before discussing what is driving this, it is worth looking at the problem itself.
I believe there has been a gradual shift away from taking a longer-term view to one where investment managers are becoming increasingly concerned about short-term underperformance in an attempt to provide clients with a consistency of return.
This may well be driven by managers’ worries over losing clients to competitors who are outperforming over the shorter term. There may also be a concern that instant gratification is prevalent; clients want their jam today.
I have always believed that private client management is fundamentally driven by longer term investing and not short-term punting. However, the pressure on investment managers to provide consistent outperformance means, in my view, that longer term investment strategies are, to a degree, falling by the wayside.
From a behavioural perspective this is understandable, as few would relish challenging conversations with clients where recent performance is an issue, especially in a low-growth and low-return environment where any underperformance is unpalatable.
The challenge for fund selectors arises at a time when, though they may still have confidence in a given fund’s process, poor performance – and the fear that this may continue – makes it more difficult for the investment manager to pull the trigger on further investment.
Holding one’s nerve can be extremely uncomfortable and can lead to doubts. How many managers have risked the sack due to their style failing over the short term, only to be rewarded with strong returns over a longer time horizon?
One relevant example may be the current high levels of aversion towards CTA strategies – otherwise known as managed futures funds, typically trend-following in nature. This aversion is despite long-term returns (for the successful provider) looking stellar versus global equities, though shorter term losses can be painful.
One only needs to look at the performance of the Winton Futures fund since launch. Having a strong relationship with clients, and client introducers, is key to explaining the investment rationale and also to highlight the opportunity. More could, and should, be done by the trade, including both investment managers and asset managers, to reaffirm that investing is a long-term pursuit with some bumps over the shorter term.
James Calder is research director at City Asset Management