Average stock-holding time periods have shrunk to months rather than years as continued uncertainty has led to managers aggressively turning over portfolios.
The increasingly short term outlook in managing assets is worrying to some fund managers who fear the effect may peter down to the very companies in which they invest.
According to Financial Express Analytics, there are 49 funds in the unit trust/Oeic universe that have made extensive changes to their top 10 holdings over the past year, and another 49 who have made similar shifts over six months.
In many cases the largest positions in these portfolios have seen a 100% change. Not one of these was an index-tracking fund.
A further 241 funds, across the entire range of IMA sectors, have made moderate changes to their top 10 positions. Moderate changes see alterations in the majority of the top 10 weightings plus new entrants, but there is the presence of some of the same names.
Anthony Cross, manager of Liontrust First Growth and Intellectual Capital, argues the industry has become increasingly short term. He notes in the 1960s the average holding period for a stock was seven years, while today it is less than one year. At that level portfolios are turning over some 100% per annum.
Nick Train, manager of Finsbury Growth & Income Trust and co-founder of the Lindsell Train boutique, is known for his buy-and-hold strategy, sometimes holding onto to a stock for more than a decade.
While he currently has a portfolio turnover level of around 5%-10% per annum, Train says he was not always a believer in such a strategy.
“I had a revelation about four or five years into my career when I was exposed to Warren Buffett’s theories. I had been trying to trade my way to glory and I realised it was a losing game so for the past 25 years I have been doing what I do now.”
But while Train is a believer in a long-term hold strategy, he does not think it is the only way in which to run money.
“There is no single correct way to approach investments. All have the potential be successful and unsuccessful and each type needs an element of luck.”
Sam Liddle, fund of funds manager at Miton Asset Management, says as he runs money on a unconstrained basis, he tends to gravitate towards similar managers.
Like Train he notes there are managers who are good at buy and hold and those which do well by moving their portfolios around frequently. Equally there are managers who do not have the skills required to do either well.
Train pointes out that one incontrovertible truth about high turnover strategies is how much they can cost investors.
“The long term costs of running money is significantly less than more active trading strategies. Academic studies in the US suggest the impact of 100% turnover on the average mutual fund adds at a minimum 1% to the running costs of the fund.”
Stamp duty, broker commissions and dealing costs are all elements that have to be paid when stocks are bought and sold so the more frequent the trading, the higher the amounts paid out.
Liddle agrees with Train about the added costs in higher turnovers and says managers who run money this way do need to be able to generate enough outperformance for the added costs to become irrelevant. “If a manager is in excess of the turnover needed just to maintain index level then how much value are they adding?”
Liddle says this is a question investors need to ask managers.
The pressure to be seen to be doing something active is not just being felt by fund managers but by companies, which in turn could result in naturally higher turnover levels.
Rathbone Income manager Carl Stick says the rise of short-term thinking in the market worries him.
It is not just a matter of managers and investors being short term but how pervasive the movement has become,
with brokers, analysts and company management following suit. “Everyone is gambling on the next two statements from companies.”
Train also notes the danger of aggressive turnovers and investors reacting quickly to market shifts as it feeds down to the way in which companies themselves are managed.
He says the recent takeover bid at Cadbury’s is an illustration of this effect. Having had a big position in the stock for more than 10 years, Train says when the initial bid from Kraft came in he spoke with Cadbury’s management.
“They talked about how impatient investors had got with them and that their performance was not as good as it could be – earnings had not really changed much in four or five years. But Cadbury’s as a business had delivered extraordinary growth and value for investors for decades. A £1,000 investment in Cadburys in 1964 would have been worth £170,000 last year.
“Yet management felt it should be taken over because of its performance over the past few years. Management’s decisions and perceptions of their own company were influenced by the short-term pressures.”
Train said companies with family ties tend to be able to resist short termism in the market, which is why he favours such firms.
He pointed to Schroders and Associated British Foods as two such examples.
Current volatility in the market may to be blame for some of the short term actions. Stick notes his own turnover levels have increased as a result, moving from 20% per annum to 37%.
Liddle believes higher turnover levels at the moment are a byproduct of the still uncertain times.
“I remember a time in small cap during the tech boom when just to stand still relative to the index a manager needed a turnover of some 200%.”
Liddle adds there are few managers he is seeing at the moment who have a concrete stance on the macro outlook, which means while they may be holding core stocks for long periods, they are trading around at the edges as market outlooks and opportunities shift.
Train says once upon a time it was just the market makers who had a monopoly on being short-term thinkers.
Today with higher trading strategies and the increase in hedge funds, plus the technology for investors to transact on their own, there is a deeper community trying to trade on a short-term basis.
The current environment has not helped. Train points out that in the 1930s an economist wrote a paper talking of the casino mentality of investments. With the markets looking radically uncertain, volatility rose and people stopped looking at the long-term opportunities.
“That appears to be a rational response and today we have been facing similar issues,” he comments.
