How long is long term? Long-term, that is, as in “that will make a good long-term investment”. It is, of course, a phrase that can mean precisely what you want it to mean but it is well used and understanding what is meant by “long-term” in the appropriate context is important. For investors, it can make the difference between making a wise decision when committing money and taking an outright gamble.
At the risk of boring those who have heard this anecdote before, I would like to share with you an experience of mine from the 1960s. Working then for one of the biggest gilt-edged brokers in the City, it was natural to lean upon the experience of my more experienced colleagues, even when they were dealing with the elite of the Square Mile rather than individual investors with limited assets.
Faced with finding a fixed-income solution for a private investor, I asked one of the senior players on the gilt desk for an appropriate recommendation for the medium term. My request was dismissed comprehensively on the basis that what my client meant by medium term was different to his understanding.
In the opinion of this sage of the bond market, short term was before lunch, medium term after lunch and long term meant you paid for the stock. In those days, as now, settlement for a gilt-edged trade was the day following the transaction but his clients would deal in many millions of pounds so their perception was somewhat different. It was not that I had asked the wrong question. Rather, I had not defined my objectives.
You can have a medium-term horizon of a few hours if your margin for profit is a few basis points – as could be the case with big trades in gilt-edged securities. Not only are equities more expensive to trade but their performance is less predictable in terms of the magnitude of movement. At least a Government stock has an end redemption value – something that seems to have escaped the minds of many equity investors.
Which brings me back to what constitutes a fair description of long term. I gain the impression that those monitoring the performance of fund managers are settling on three years as sufficient time to demonstrate whether or not real skill exists. This may be a reasonable period but it could prove simply to be only one part of an economic or market cycle. Succeeding in all conditions is what counts.
One fund manager of my acquaintance, whose successes had encouraged accolades during the mid-1980s, sat in self-confessed panic when the rapid bear market of 1987 destroyed the perceptions he had built over the previous few years. To be fair, he was not alone and he recovered his poise swiftly.
But there were managers who found the rapid change in market conditions that then developed impossible to cope with. Indeed, few have successfully demonstrated a capability of coping with the very wide variety of experience that these capricious markets of ours can deliver.
It is true that many of the names that head the three-year performance tables are tried and trusted managers bloodied in market conditions of a wide variety but is a reputation built during a period when simply avoiding losing money can be considered a virtue sufficient? Perhaps, for the cynically minded, these tables are developed more as a consequence of the length of time when appropriate information has been available than to any magic period over which a fund manager can be declared to be competent.
In defence of the latest tables that prompted this reflection, many of those with high scores can demonstrate an even longer period of competence. Fidelity's Anthony Bolton, Discretionary's Simon Knott, Credit Suisse Asset Management's Bill Mott – all feature and all have real long-term form – by any measure. Anyway, I still believe it better to trust an outstanding performer in a bear market to one who merely demonstrates they can ride a momentum wave.
Meanwhile, recent net sales figures for unit trusts and Oeics suggest that private investors are growing in confidence. The investment industry can take comfort from the fact that December figures were a marked improvement on November. But the most popular sector was UK corporate bonds. The optimism is clearly tinged with caution still.