The trend for investors to chase short-term gains is creating excellent opportunities for fund managers willing to sit back and take a long-term outlook, says new Franklin Templeton Investments portfolio manager Martin Cobb.
Cobb, who joined Franklin Templeton in December as a UK specialist, one of 53 analysts working within the group globally, says the long-term opportunities currently presenting themselves are some of the best that he has seen in his 12 years in the industry.
He says many clients are putting increased pressure on fund managers for short-term returns, looking for gains in periods as short as three months or a year.
“People are chasing the next best thing and I think that is a risk for the people employing those type of measures. But more so, I think there are fantastic opportunities for someone who is willing to stand back, view what is going on in the market and buy those out of favour stocks, or sell those currently very in favour stocks to make superior returns over the longer term,” he says.
Cobb says one of the reasons that he was attracted to working for Franklin Templeton was its belief in a long-term strategy, saying he does not have confidence in any other stockpicking approach.
Factors such as the large amount of market information and analysis available, increased reporting by companies, insurers becoming forced sellers and then buyers because of their derivative positions last year and the increasing number of short-term investment vehicles such as hedge funds have all contributed to the increased short-termism being seen in the market, he believes.
“You are seeing sharp share price swings, the market has been very volatile because there has been a lot of uncertainty over the macroeconomic outlook, we have had wars and we have had this impact of life companies being forced sellers because of their delta hedging process, meaning that share price moves have been much more accentuated than they have been in the past. My view is that there is increased evidence that people are feeling the pressure and chasing the returns,” says Cobb.
He points out that some companies are giving up to eight financial updates a year, including four quarterly reports and four pre-quarterly, adding more push to short-termism. “Businesses do not change that much eight times a year.”
Last year, in the lead-up to the Iraqi conflict and the global economic slowdown, there were a number of good-quality businesses that were trading at very low levels on the equity markets, according to Cobb, pointing to the example of advertising group WPP which in February/March was below £4.
“Nobody could see any economic recovery, then, hey presto, the war is out of the way, the economy is picking up, there is monetary and fiscal stimulus here and in the US, the share price is up by 50 per cent and then no one is willing to sell it because the recovery is coming through. That strikes me as being very short term.”
He lists Unilever as another promising stock, saying that while people were very positive about it, they have become jaded following profit warnings.
Cobb says a top consultant recently came out with a proposal for offering fund managers 10-year mandates. He thinks it would be difficult to convince a consultant or client to give a fund manager 10 years to manage their money but it gives credence to his theory.
“They are starting to recognise that chasing the short-term gains is possibly a recipe for disaster and certainly asking your fund manager to chase short-term gains is not necessarily the best way of going about it.”