How the investment world has changed

Decline of the old boys’ network

John Ricciardi, head of investment at Kestrel Partners LLP, came to London from France in 1981. As he remembers it: "Back then it was essential that you had political as well as professional connections. The brokers serviced the money managers and the chairmen of all these companies were interrelated – they all went to school together and Oxbridge together and all had membership of the same private clubs."

"The main skills you needed as a money manager were, you had to know the best restaurants in the Square Mile and know about fine wines, as from Monday through to Wednesday you would be at lunch for three to four hours a day. You needed to go shooting often, it helped if you liked opera. You had to have tickets to all the main events like the Henley Regatta, Ascot and Wimbledon."

"There were no comparison tables, either of fund or manager returns, so everyone headed for the centre of the patch – there was job security for everyone so long as you didn’t deviate from the norm."

"Back then commissions were fixed – brokers and money managers charged the same to everyone and there was no way to compete. The Big Bang changed the whole thing – it was the best thing that ever happened to London and made it the number-one financial centre in the whole world."


Greater focus on academic skills

Julian Chillingworth, manager of Rathbone Recovery, started as a graduate trainee at Phillips’ pension scheme more than 30 years ago. "The only formal training available back then was the stock exchange exams, which I did," he said.

"I was forced to work in the back offices for a few years and had to learn how the business worked, which I can now look back on as a useful experience."

"Now everyone has the CFA. Everyone is academically better trained but are they necessarily better? They don’t necessarily have a broader understanding."

"Investing is all about intelligence and the ability to make decisions. The focus on academic training has shaken some of the less capable fund managers out of the business, having said that though, Warren Buffet didn’t have any formal training, he just worked for good people, like I did. It isn’t black and white."


Easier access to information

Ricciardi is impressed that he can now get the majority of the data he needs from his iPad without leaving the comfort of his bed, which he says is quite a change from the old days: "You used to get all your information either from relationships with other managers, brokers’ reports, the major banks or the papers," he explained.

"You used to have brokers’ reports of about two to three feet on each stock, and there was a running joke that when the stack of reports on a stock fell over, it was time to sell. There are so many information sources around these days I haven’t looked at a broker’s report in years."

Simon Gergel, manager of the RCM Merchants Trust, believes the sheer amount of data available is one of the biggest changes compared with when he started: "There is now much greater availability of information on companies, their competitors and their industries, meaning it is essential to have an organisation and a methodology for processing the information and analysing businesses in a systematic way."

Gergel, however, believes this brings with it a new set of problems. "It is generally more difficult to have an informational advantage now and therefore investors need to have some other advantage as well, such as valuation discipline, a contrarian approach or timing skills," he added.

Colin McLean, managing director of SVM Asset Management, agrees with Gergel’s last point: "Seeing through that surplus of research and analysis has become more of a challenge, as has picking out an original objective."


Move towards a global focus

"I came to the UK in 1981 when everything was very domestically focused – the only asset classes you thought of were gilts, UK equities, UK corporate bonds and gold," said Ricciardi. "The vast majority of fund houses now have a global focus; after all the UK only accounts for 5 per cent of the world market and no-one is happy to settle for that amount."

Gergel agrees with Ricciardi: "Investors and companies now have a far broader geographic spread," he explained. "UK companies earn over half their money abroad and investors need to have a clear view on developments across all major developed and developing economies. For investors the valuation of a company is as likely these days to be set in relation to its industry peers as to the domestic market."


Higher volatility and greater focus on the short-term

"Managers certainly feel short-term pressure more now and, even encompassing large market moves, there is less tolerance," explained McLean.

Gergel said: "While the crash in 1987 was extremely violent, for most of the 1980s and 1990s it was rare for markets to move more than 1 per cent in a day, whereas that has become almost the norm recently. Investors need to be able to deal with this, either by reducing tracking error (risk) relative to the benchmark or by focusing on longer time horizons and ignoring day-to-day moves."

Gervais Williams, manager of Acuim UK Multi Cap Income, believes the trend away from paying out dividends has been one of the biggest contributors towards the increased volatility: "By giving shareholders regular dividends, the share prices don’t bounce around so much. If we buy a company generating no income, then when people sell, valuation does come into it, but companies with low income or no income tend to fall faster than the market."

"If you’ve got a company with a 12 per cent yield, it could halve, but as it goes down through a 9, 10, 11 per cent yield, if it continues to pay, new people will continue to buy it. Don’t get me wrong, you can lose money, but it’s a much less bumpy ride."


Broader investment base

Gergel says a wider variety of investors has been one of the main drivers towards the short-term focus: "Twenty years ago, markets were dominated by long-term focused institutions, pension funds and insurance companies, as well as private investors," he explained.

"Nowadays there is a much wider variety of investors, including hedge funds, high frequency traders, sovereign wealth funds, ETFs and so on. In general this has led to a shorter-term focus and shorter holding period for stocks. A US-style market focus on short-term earnings momentum has become far more pervasive, with share prices reacting more violently to an earnings miss. Modern investors need to be aware of this factor and either try to build it into their process or adopt a much longer-term focus which can benefit from excessive short term moves."


Improved corporate governance

"In general accounting standards have improved in the last 20 years, with better disclosure and understanding of issues like pension fund deficits, lease commitments, use of provisions and exceptional charges," commented Gergel.

"At the same time, corporate governance has generally been improved with, for example, the introduction of senior non-executive directors, a stronger takeover code and better disclosure on executive remuneration policies. These tools enable investors to be better informed and to exercise more control over the companies they own. Best practice these days requires investors to have the capability to analyse and process voting and corporate governance issues regularly."

Ricciardi added: "Things like attributions analysis show not just whether the managers are making money, but if they are making it the way they say they are."

"These days, managers aren’t just selling a product, they are selling a corporate product. Companies require a manager to not just present outperformance, but performance using the approach that the company is selling."


The credit boom

"The credit boom of the last 25 years has completely changed the investment landscape," commented Chillingworth.

Williams agrees with him: "Some managers have had their whole careers in the credit boom, and they think it’s normal, but it’s not," he said.

"Throughout the last 25 years, many companies, especially smaller ones, were told not to pay out a dividend, reinvest the cash, grow as fast as you can. During the credit boom, you would only buy income funds for a steady stream of income."

"If you were looking for total return you went for capital gain. That’s because, in the last 25 years, if you just put all your money into your house, or houses, you would have made five times your money and if you geared it, with a 90 per cent mortgage, you would have made 50 times your money."

"It’s been hugely exciting to try and make capital gains in the last 25 years. During credit booms, capital gains become the dominant way of making money. Of course, we’re not always in a credit boom.”


Morality

Williams surely has the final word on the biggest transformation in the investment world in the last 25 years: "Back in 1985 when I started out, it wouldn’t happen now and shows how much things have changed, I can remember meeting a PLC that was having quite a difficult time. It was wondering whether to cut its dividend, and the directors, who owned about 40 per cent of this company, decided to continue to pay ordinary dividends to the external shareholders, and just said: 'We’ll skip our dividends, just not take the money at all.'"