Fund managers should stop blaming poor performance on bad luck

We have inflation, the end of cheap money printing, ongoing supply chain issues, the threat of war in the Ukraine, trade restrictions and sky-high valuations.

It is time for a stock rotation, it may even be the moment for an almighty correction.

You may sigh, you may mutter about diversification, but you still may end up having to pick up the phone to some panicky clients.

Fashion is a funny thing, particularly when it comes to investing.

The funny thing about style is how casually market analysts can talk down bad performance

One of the good things that may come from a sizeable fall in stocks would be to dent some of the confidence from new investors who seem to me to be too exposed to volatile equities, too overconfident with their risk and too poorly prepared to be in the market for the long-term.

And a correction may also make some think twice about the supposed unstoppable trajectory of low-cost tracker investing. In the past 15 years this has seemed like a one-way bet in markets bloated with cheap central bank funds. It may not in the future.

That should all mean an opportunity for fund managers to suddenly prove they can earn their place – particularly after so many years of being trounced by Vanguard Lifestrategy funds.

But I bet they will blow it. And they will blow it because of the way they communicate with investors, the lack of accountability they show and because they are mostly still stuck in a world where stubbornness is held up as a virtue.

What seems likely with the changes in the market is a rotation from growth to value. Valuations, particularly across the pond, have been frothy for a while. More than a third of the shares on Nasdaq, the American technology index, are priced at or above 10 times their annual sales.

Earnings seems to have lost almost all relevance in the conversation about investing. Value is back (probably). 

So what becomes of the growth managers?

The funny thing about style is how casually market analysts can talk down bad performance as being driven by a type of fund manager based on their long-term bias towards a certain strategy.

Does no one in the industry realise how utterly baffling that kind of casual disregard for underperformance really sounds to the average investor? It is about the only world where we routinely tolerate underachievement by dismissing it as bad luck.

And there is an irony that it is the type of thing no fund manager would ever tolerate from a company they invested in. You wouldn’t just blindly stick with the shares of Next if you believed that the whole business had fallen out of fashion and management were doing nothing to change it. 

Sticking with style is fine if you are running a special situations fund, but it is not okay if you are competing in a market where the only true measure of performance is how much money you make for investors.

You need to do one (or both) of two things: you need to properly communicate with investors and explain why your investment strategy is fit for purpose (see Terry Smith as a fine example), or you need to change course and really show the value of those annual management charges by showing you can change with times.

EGS accountability

We’re just a few weeks in to the year and fund managers have wasted no time in launching environmental, social and governance funds.

The leader of the pack was M&G, which has just launched a sustainable equity fund. One of the aspects of the fund was that it would invest in companies generating gender and ethnic diversity at work. What M&G means by this is that 30 per cent of the board have to be women and from an ethnic minority.

Very laudable. It’s all virtue signalling, of course. Not only is 30 per cent extraordinarily lacking in aspiration, but it seems designed to pass the criteria of M&G’s own board and executive committee, which scrape through with women, but not at all on ethnicity.

Boards are easy to measure and so are easy targets to hit; actual ESG fund managers require diversity from the shop floor and set aspirational targets.

As I’ve said many times before, if mainstream funds were properly accountable then ESG would not be necessary.

Higher climb, harder fall

It’s another record year for equity release. Of course it is, every year is a record when you are a fast-growing product.

The question is how can this last before the mistakes of the past catch up for the sector.

Current lenders celebrate the flexibility, cheapness and the rigour of products, but there are thousands of customers who cannot remortgage left on high rates on inflexible products.

The reputation of this sector has improved hugely in the past 15 years or so. It could all be undone if these legacy products are not changed.

James Coney is money editor of the Times and Sunday Times