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Former IA boss hits out at fund manager short-termism

Short-termism in the way fund managers run clients’ money has had a “devastating impact” on sustainable wealth creation, former Investment Association chief executive Daniel Godfrey has argued.

Speaking at the Money Marketing Interactive conference, the co-founder of the People’s Trust has urged advisers, providers and fund managers to rethink time horizons for investments and “break the chain” which ties them all to short-term thinking.

He says: “Looking at the aggregate behaviour in the investment chain, we should ask ourselves what this aggregate behaviour tells us of the purpose of this chain. I’d say it is a long way away from an investment focused on sustainable wealth creation.

“That’s because we know some of these behaviours are quite short term. Most of us don’t have to buy an annuity aged 65, and are potentially living on the capital we acquired and we can still be investors at 65 for 25 years or more. So we need to think about time horizons, which are now decades, not months.

“A more devastating impact of a failure of investment management to really invest against the time horizons of our clients is the infection with short termism. The fact that chief executives of public companies are under huge pressure to match the expectation of investment bank analysts…It is all about bringing forward tomorrow’s lunch as today’s”.

Godfrey points out even though cheap passive funds are proven to beat the index over the long term compared to many underperforming active funds, indexation is just a product of all the short-term prices in the market.

He says: “We have to find some way to breaking this chain. I wouldn’t blame asset managers or consultants or advisers because we are all locked into a loveless chain, which is incredibly resistant to change.”

Also speaking at the event, Square Mile head of investment Jason Broomer called for better communication between fund managers and investors.

He says most fund managers are willing to provide additional information on funds’ performance or objectives but are “blocked” by compliance offices because “they were uncomfortable on what we were trying to present to the underlying investors”.

Broomer says investors need a measurable performance target, which is both appropriate and achievable, as well as and meaningful.

He says: “We look at the time period in which an investor should assess performance over the fund’s track record. This is required information to make a judgement on a fund to achieve what the fund has promised.

“Many of the asset managers we spoke had to think quite hard about this because no one has asked these questions before”.

He used the example of a European fund factsheet saying it aims “to generate first quartile performance over quarterly periods”.

“This is an equity fund,” says Broomer. “How on earth can an equity fund be generating performance with that limited time horizon? It is nonsensical and this is what you find on every fund factsheet”.

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  1. I suspect it’s mostly investors who think short term – particularly those who are not subject to advice (or where the advice hasn’t managed expectations).

    Over the years, we have taken on a large number of new clients who have had fingers burned and dis-invested – often in good funds but with (with hindsight) unlucky timing.

    I often point out to clients how the timing of an investment makes a huge difference to the performance – the only issue is that you can’t decide whether the timing is good or bad but over the long term, that timing has less importance.

    I also spend time ‘educating’clients of the difference between saving, investing and speculating and that we only add value when it’s the middle one the client wants.

    Once a client understands how we think, short term performance becomes less of a concern with their bigger ‘financial planning’ picture remaining the main focus.

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