Active fund managers should act like private equity investors, sticking with quality companies for the long term rather than trading out of them on short-term news-flow, according to Zehrid Osmani (pictured), manager of the Martin Currie Global Portfolio Trust.
Osmani said there appears to be some confusion among his peers around the term “active management”, with some fund managers taking it to mean actively trading shares. Yet he pointed out that while they may feel they are doing what they are being asked, this is counterproductive
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“A lot of the time, high turnover tends to be costly to investors because of trading costs and it doesn't always generate value. That to me is a continuation of short termism.”
The manager said that short termism is being exacerbated by technological developments, specifically the rise of “big data”, which refers to data sets that are too large to be processed by traditional databases. While modern technology allows analysts to make better and faster decisions using data that was previously inaccessible or unusable, Osmani said it encourages what he calls “nowcasting”, rather than “forecasting”.
“‘Nowcasting’ goes back to short-term behaviour, because you're acting on information that makes you feel good, because it's current,” he continued.
“It's only current in so much that it's a spot picture rather than a forward-looking picture. So it's down to us as investors to think about going back to how you forecast accurately over the long term.
“And that involves using the right valuation tools. So rather than just focusing on valuation and P/E multiples, it's working out the true value of a business.”
As well as technological advances, Osmani said short-termism can also be blamed to some extent on human nature. The manager said it is natural to feel lonely when you can see the market is moving and you are not doing anything, but it is important to resist temptation as giving in risks creating a vicious circle.
“The reality is, if you focus too much on the short term, you're hunting in an area of the market, which is very noisy,” he added.
“In the short term, share prices get impacted by sentiment, technicalities, ownership, and how those move.
“But in the long term, noise gets dialled down. So if there is a stock that you believe is undervalued, that has a high return on invested capital, a high cash-flow generation profile, give it enough time and as that cash-flow profile comes to the forefront, the market will not be able to ignore its undervaluation.
Source: Martin Currie
“It is like the Warren Buffett quote: ‘If you are not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.’
“Or put it another way, successful investing should be behaving almost like a private equity investor, but in the public equity space.”
Osmani is the latest in a long line of fund managers who have attributed their success to taking a long-term view on businesses. For example, Stephen Yiu of the LF Blue Whale Growth strategy said the US market is efficient, but only over the next quarter; Carlos Moreno of the LF Miton European Opportunities fund warned that trying to beat the market over the short-term involves trying to beat a computer at its own game; and numerous managers from Baillie Gifford say they take a view of at least five years on companies, and a lot longer, in some cases.
So if the evidence suggests the way to outperform is to take a long-term view on companies, why don’t all managers purposely try to avoid the drivers of short-termism mentioned above? Osmani said another problem is that stakeholders often demand strong performance quarter in, quarter out, which is not realistic.
Therefore, it is down to managers like himself to educate the end investor, which involves one of the most difficult tasks of all – regaining the trust of the public.
“How do you build trust? You deliver the right outcome to your clients,” he continued, “and you deliver it in a consistent basis. So it's about alpha generation, but alpha generation done consistently, and once you've delivered that, you also have to explain to your investors that you have a structured process in place.”
He also said it involves being upfront about when he will underperform, which he said would be likely during a value rally. Value has tended to outperform growth over the extreme long-term and while this style has been out of favour over the past 10 years, should it become the go-to strategy for a similar length of time, Osmani admitted he would be likely to lag behind his peers and the market.
Performance of indices over 10yrs
Source: FE Analytics
If this were to happen, would he stick to his quality growth strategy?
“The answer is very simple – yes, definitely,” he said. “We have always been very clear with investors about that.
“Investors have to find the right portfolio managers, which have the right mentality, as well as the right structured investment process, and that have the strength to follow it day in day out, even if the markets take them in a different direction.”
Data from FE Analytics shows Martin Currie Global Portfolio Trust has made 20.96 per cent since Osmani became manager in June 2018, compared with 13.91 per cent from the FTSE World index and 7.04 per cent from the IT Global sector.
Performance of trust vs sector and index under manager
Source: FE Analytics
The trust has ongoing charges of 0.63 per cent. It is on a premium of 1.45 per cent, compared with a discount of 0.26 per cent and 0.54 per cent from its one- and three-year averages.