‘Seal up the mouth of outrage for
Till we can clear these ambiguities,
And know their spring, their head, their true descent’
Romeo and Juliet
Three cheers for Warren Buffett! Yes, that’s him, one of the most successful and celebrated investors of the last 100 years. And yes, he recently owned up to one of the most jaw-droppingly dud investment decisions of modern times – a huge investment in Tesco. Never mind that in the past 30 or so years returns from his investment activities made scores of his shareholders millionaires. Right now, think Buffett, think Tesco.
Envious investment managers should beware of any schadenfreude. The Sage of Omaha has simply reminded the world how fallible we all are. Mistakes punctuate the professional life of every investment manager on the planet. But if the best can get it so wrong, many investors must wonder what hope remains for the rest of us journeymen. Not much, judging by the financial press. When our usefulness is measured by their criteria, investment managers tend to get dismissed as overpaid underachievers. Hold on though.
While competence in any professional field should generally be presumed, it ought to be able, when questioned, to prove itself by results. If results are to be measured, however, it can only be against success in meeting appropriate objectives. An investment manager’s success or failure can be readily measured when the objective is purely numerical, or the goal is simply to win a race against peer competitors. The calculation involves only arithmetic or a table of figures. That is how the ‘performance’ of thousands of managers of specialist collective funds is routinely measured.
If, however, the objective is broader, perhaps to provide financial security for somebody’s retirement, to preserve a living standard for current or future generations or, broader still, to give an investor peace of mind, the calculation of a manager’s usefulness becomes much more subjective. The term ‘investment manager’ has come to embrace a wide spectrum of activities, ranging from that of an individual appointed to manage a specialised collective fund with narrowly-defined objectives to that of a firm which holds responsibility for looking after all of a client’s financial resources. A host of intermediaries with varying objectives operate between these extremes.
Disparate though their objectives may be, ‘investment managers’ get commonly dumped in the same pile. Failure to distinguish their separate roles has wrought much collateral damage.
Fair enough, analysts have cottoned on to the fact that most managers of collective funds consistently fail to keep pace with some or other market average. Unsurprisingly that failure has attracted investors (and their advisers) towards financial products guaranteeing simply to match the given average or index. Fortunes then soar and plunge on the index roller coaster. Over the last 15 years anyone who bought such a product linked to the FTSE equity index would have received a total real return of about 2½% per annum. Not much, one might think, given the discomfort of what has been a white-knuckle ride. An equity index-tracking investor is like a bidder at an auction who guarantees to match the winning price for every lot without bothering to check whether he’s buying treasure or trash. Yet, according to the Bank of England, ‘passive’ investment products accounted for US$8 trillion by end 2012, or about 13% of global market values.
Granted, index-tracking has its uses. Buying an indexed fund is an easy way to ride a short-term boom or exploit a bust without dealing in individual investments. Used as a core strategy, however, it defies common sense. If markets are to channel capital efficiently, their constituent movements need to reflect more or less rational value judgements. Without them, markets would freeze in a sterile vacuum.
Another regrettable outcome of woolly thinking is the personalisation of the investment management profession. Understandably, journalists prefer to write about people rather than abstract topics. Medals are awarded to individuals; mud sticks best to a face. But in truth, when investors consign savings for investment, the recipient in 99% of the cases is a firm, not an individual. Money invested in a collective fund is usually managed by a fund management company. Funds consigned for discretionary investment management are received in virtually every case by a firm authorised to manage them. Certainly, one or other individual may be appointed to ‘manage’ a specific collective fund and some will be better at it than others. But none is individually responsible for the funds entrusted. The management firm is.
This distinction should matter to private investors because it affects the continuity of approach applied to their investment. Wherever a portfolio’s profit or loss is attributable, rightly or wrongly, to an individual, his or her departure is likely to change expectation about future results. The departure in 2014 of one or two starred individual managers from UK funds to which they were attached created a tsunami of investment switching. Results reflecting a collective endeavour, the expression of a beehive culture, should be sustainable irrespective of personnel changes.
Disaffection with one part of the fund management profession – that played by retail fund managers – has given rise to criticism of management charges more generally. Certainly the charging structure of the retail financial products industry was overdue for reform and the regulator’s insistence on genuine cost transparency is to be welcomed. Elsewhere, however, misapprehension about the nature and objectives of other parts of the investment management profession frustrates any worthwhile assessment of their value.
So far as discretionary managers of personal savings are concerned, interested parties need to understand how their work differs from that of others in the financial sector.
For the vast majority of private clients, protection of their financial resources’ real value is the first concern. Naturally, they also want to see some increase in that value over time. In the meantime they want their manager to try to shield them from market plunges. Above all, they want to be confident that their financial assets are being sensibly organised by capable and experienced people collectively applying their best efforts. The manager should be able to supply evidence to justify that confidence. That cannot be done by straining after an irrelevant or unattainable objective. Rather it involves single-minded pursuit of ends that truly matter to a client. Attention to detail, efficient administration and a considered investment narrative are all crucial ingredients in adding value for the client.
Out of this fertile mix, seeds of added value can grow to support a well grounded confidence for the future. Ultimately, success for a personal investment manager consists simply of a client’s resulting peace of mind.
In the end, satisfaction for the client (and success for the manager) consists of a mental state. That is not a condition measurable by financial analysis or performance tables. Indeed its value cannot be quantified at all. So viewed, the efforts of a personal investment manager may look like a rather insubstantial pageant. Yet as long as they serve an attainable and worthwhile objective, their value will not fade. When the picture is fully drawn and the results reviewed, personal investment management has plenty to say for itself. Paradoxically, analysts who still crave material evidence of value added through this holistic approach can find it readily enough in the figures.
Buffett has been a marvellous investor over his lifetime. That is why his reputation outlives an occasional ‘Tesco’. Curiously, though, his testamentary guidance for his wife discredits the very skill that underlies his own route to success – spotting businesses with a sensible objective and a culture capable of achieving it. The good lady is advised to buy only government bonds and an equity-linked indexed fund with her inheritance. Presumably the wizard of Omaha doubts whether other managers are capable of adding as much value for clients (shareholders) as he did. He is right to doubt it.
All the same, one surmises that many investors would be pleased with a fraction of his success. Of course they would have to be confident that their manager was likely to achieve it. Our job is to give them good reasons for that very confidence.
12th January 2015