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The three biggest changes to the market over the last 25 years, according to managers

15 November 2015

FE Trustnet asks a panel of successful and experienced fund managers about the changes they’ve noticed in market patterns and investor behaviour over the years.

By Lauren Mason,

Reporter, FE Trustnet

It’s well-known that markets are unpredictable and will behave in the strangest of ways at the most unexpected times. August is a prime example, when the Chinese rout wiped hundreds of billions of dollars off markets across the globe, with the FTSE 100 alone shedding £74bn by close of play.

It’s odd to think that just week later, the FTSE had all but recovered its gains.

Of course markets fluctuate in this way, but have there been notable changes in market or investor behaviour over the longer term?

FE Trustnet asks a panel of experienced and highly-regarded fund managers if they have seen any major differences over the years, and we explore their observations in the article below.

 

Short-term investing

Craig Yeaman (pictured), manager of the Saracen Growth fund, has been at Saracen since 2008 having moved from Aberdeen Asset Management. He has a career spanning 25 years and he says that during this period he has noticed that investors’ time horizons are getting significantly shorter on average.

“If you look at analysts and you look at investors, they seem to be pre-occupied by the next quarter numbers or the next half-year numbers from companies, and because we’re long-term shareholders in businesses that’s just noise to us,” he said.

“We use the volatility that can be exhibited with quarterly and half-year numbers to top up in positions we’re actually very keen on. For us, if a company misses revenue forecast by 1 per cent on a quarterly basis it doesn’t concern us at all.”

While the manager spoke of direct investors, it is clear that the average fund holding period among private investors has become shorter and shorter thanks largely to the huge amount of information available.

This means that investors can now be very excited about six months of outperformance or sell funds, which have generated a strong long-term return, due to a period of weakness. While the Tom Dobell’s M&G Recovery fund has been struggling for longer than many of its investors would have hoped, it is a good example.

Over Dobell’s 15-year tenure, the £3.8bn fund has returned 126.82 per cent compared to its sector average and benchmark’s total returns of 86.62 and 83.71 per cent respectively, having beaten the FTSE All Share in each of first 10 calendar years that Dobell was at the helm.

However, if an investor had bought and sold the fund within the last three years, they would have seen it deliver just one-thirteenth of the returns of its peer average.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Yeaman is unsure why investors have begun to adopt shorter term attitudes, but warns that failing to hold investments over the long term can pose as a big risk to investors’ capital.

“To us, it’s gambling because quite frankly, I have no idea what the market is going to do over a three or six month or year view, but over a five year view I can give you a sensible answer,” he said.

“We’re not clever enough to tell you what’s going to happen so we’re long term investors in companies, and because we do so much work in the beginning of the process, this allows us to have that confidence.”


Less tactical trading

FE Alpha Manager Luke Newman, who runs the five FE Crown-rated Henderson UK Absolute Return fund alongside fellow FE Alpha manager Ben Wallace, has noticed a growing sparsity in long/short strategies in markets over the last two or three years.

Henderson UK Absolute Return is divided into both core and tactical strategies – currently, the fund has a far larger weighting in short-term liquid plays because the managers believe there will be further volatility to be taken advantage of in the markets in the near future.

“When I look at our tactical book and work backwards from currency volatility or yield curve volatility, or even commodity price volatility, it feels like we have longer to get those trades in place in current markets,” he said.

“In some ways the equity market feels less efficient than it used to, whereas the bond market and the currency market react very quickly to payroll data or speeches by central bankers. I think this is because many of the long/short funds and absolute return funds that haven’t delivered for investors, particularly during drawdowns in markets, have been closed down.”

According to the latest data from the Investment Association though, more and more investors are buying into the IA Targeted Absolute Return sector, as it has seen positive inflows every month since August 2014. Between August and September this year, which is the latest time frame that the data stretches to, the sector saw the second-highest net retail sales within the Investment Association universe.

Despite this, Newman says his peer group is becoming thinner than it ever used to be, which allows him more time to react to trading opportunities he sees in the market and to lock positions into his tactical book and take advantage of the volatility in markets.

“I think it’s a very significant change that’s happened over the last few years and it appears to be helping returns for funds such as ours at the moment,” he added.

Over the last three years, Henderson UK Absolute Return has returned 33.53 per cent, more than doubling the performance of its sector average.

Performance of fund vs sector over 3yrs

 

Source: FE Analytics


Independent research

A positive change that has been noted is that more information is available to investors now than ever before.

James Illsley, manager of a number of funds including JPM UK Equity & Bond Income and JPM UK Managed Equity, says that when he started in the industry 25 years ago it was immensely hard to get valuation data on companies.

“Even something as simple as a price-earnings ratio was a job for the research team, which is something we take for granted today,” he said.

“Like many industries, there’s an awful lot of information available to investors now and one of the differentiators going forward is how investment companies use that information and how they use it to the advantage of their customers and clients.”

Not only has technology improved which has led to data becoming easily accessible, the introduction of acts such as RDR in 2013 have meant that both companies and investment vehicles have had to increase their transparency and the accessibility of their details.

“For us it’s all about how we use this immense amount of data – there are any number of valuations available to us from outside brokers third parties, and using that data to our best advantage and winnowing through that big data and using it to our customers’ advantage is fundamental,” Illsley added.

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