As I’m sure most parents experience, my son frequently asks me: “What was it like in the olden days, Dad?” The same question can often be asked of the fund management industry.
When I was first involved with unit trusts and mutual funds - more than XXX years ago (you need to guess how many!) - fund managers would sit at desks all day long studying the latest reports and accounts of listed companies, and reading research from favoured stockbrokers. Occasionally, they would get out of their offices to meet and talk with company directors and owners, to “kick the tyres”. They might have referred to this as a “field trip”, as if it were something quite unusual.
Today, that is simply not good enough, especially if you want to be considered a top-rated fund manager.
Not only are you required to understand all there is to know on your specialist market, you also need to be able to provide a compelling story about why you, rather than the next guy, should be selected for use by fund distributors.
Managers have become industry specialists. There is the emerging markets guru, the forestry boffin, the commodities specialist, the energy king, the Chinese expert, etc. Indeed, in the fund management industry these days, if you are not an expert on your given market or subject, you are nowhere.
Such specialisation has been good for the development of the fund industry. It has enabled the collection of infinitely more information from which to make investment decisions. It has also meant that talented managers are fully supported by a team, rather than acting alone. This enables better succession planning for a fund in the future. But I am not sure how much it has improved the returns achieved on the funds managed.
I sometimes wonder whether there is a point at which you might know too much, in which case the investment opportunities seem to get lost in the mist. The challenge, therefore, is to be able to find those managers with a rounded sense of the investment opportunities, and that can time their activities to maximise the return on the fund they manage.
In the past, Asian markets were often regarded as being too exciting and thus unsuitable for the traditional “widows- and orphans-type investors”. The volatility in the markets was fine for those in the region, but for European and American investors it was too much to bear.
Managers in the region would say they were better than those trying to manage Asian assets from London or New York because they were closer to the market - and thus better able to know what was going on, plus they could act quicker. The Asian markets were considered less well-researched, thus relatively inefficient when compared with those in Europe and the US. This inefficiency was what many local managers felt gave them the opportunity to make bigger bets on investing, to get better returns.
No longer is this the case. Asian markets are just as well-researched today as those in most other locations. Indeed, with the increased focus of global emerging markets funds seeking opportunities to invest, the major investment banks have all set up substantial research teams to visit companies to get as much information as they can from them to enable reports to be written and distributed to their fund manager clients. These days there is very little new, and rarely any major surprises among the top stocks in each of the regions markets. Bloomberg, Reuters, CNBC, the Financial Times and many others communicate to both investors and fund managers instant opinions on the latest happenings.
So does this mean that investors today are doing better than say 25 years ago? Not necessarily. An inevitability of growth is that returns become flatter. It is almost impossible to achieve 30% per annum returns indefinitely. Also, interest rates and inflation have a massive impact on the returns achieved from stock markets.
In periods like now, of low interest rates and low inflation, returns from equities are also likely to remain relatively low. Getting above the annual return threshold of say 10% to 15% is increasingly difficult. This should no longer be regarded as a problem, it is simply a reflection of the times. Modern times!