Monday 9th November 2020
What do financial advisers want from their fund managers?
Words, words, words *
Many of us spend quite a bit of time reading commentary and reports from fund managers. At times it feels like a desperate search for truth, or at least a unique insight that comforts one that investing has fundamental foundations.
There are a large number of big-picture reports which are typically good reads. The likes of Howard Marks, The Absolute Return letter, GMO’s Ben Inker and James Montier, as well as a myriad of sites such as Seeking Alpha or A Wealth of Common Sense. While they rarely have any particular investment outcome, they can explain and illuminate. Our persistent problem is confirmation bias, which influences us to absorb ones we agree with.
When it comes to fund manager material the picture narrows. Many provide ‘insights’ separate from performance reporting. There is plenty to absorb that is very helpful, particularly in analysing trends. It though acknowledges its own confirmation bias – a value manager can explain the data behind the lagging performance of value stocks, but clearly will not concede to data that might support growth and momentum stocks. Nor will a bond manager tell you that high-yield is the best place for current investing.
The fund performance reports are problematic. The bulk make mostly inane well-known introductory comments about the general state of economies and the recent performance of relevant indices. Then we typically get a run through sector or thematic data at a high level before heading to the fund’s top three out- and under-performers for the month. What have we learnt?
Take this further, charts shown from since inception as though investors collectively experience it from day one, or a starting point that one assumes flatters performance. Never mind the listed investment companies (LICs) that don’t have an index, apparently.
Cut to the chase on what we see in today’s markets. In equities, it is obvious those with holdings in favourite techs have outperformed all else. Yet few of this cohort nut-out a case for the uncertain or disbelievers to get on board. Where is a work-through of the upside case for stocks on very high valuations? Value-oriented managers offer little more than carping on about how solid the outlook is for their selection. How about what has happened to their valuations over time; have they delivered on expectations; or are revisions par for the course? Just shouting that its unfair won’t get one across the line.
It is rare to see an attribution of any kind, and data on metrics such as P/E, earnings growth, etc is notably absent, even good old risk measures are clearly not important as they don’t feature outside the original promo material.
We are often told to learn from our failures. Fund reports are akin to the sensitivity displayed for school starters. A delicate comment on a stock that ‘disappointed’ is the most one sees. Misjudging trends is part of humanity, but within a team of experienced analysts, is there enough debate and voice for the contrarian?
Asset classes outside equity are not much better, though fixed income is the most grounded given that monetary conditions do really matter. Where the commentary is lacking is, for example, in spread sectors with little historical context provided on where they sit and influence of current conditions.
Complaining about fund managers is one thing, the advisery world could do more to decide what information is useful. What do we need to know about the fund’s current position and what data should we expect to find that we can usefully apply to a decision on the fund’s role in a portfolio? In the new reconciliation world, can we meet in the middle?
*choose between comedian Bo Burnham, Lerner’s My Fair Lady or Shakespeare’s Hamlet – all of which use words x 3 to great effect.
Giselle Roux is one of Australia's most well-known and highly regarded investment strategists, having held the role of Chief Investment Officer at both Escala Partners and JB Were. She has also held a number of senior equities analyst and investment banking roles including with Citigroup, Bank of America Merrill Lynch and McIntosh Securities. Giselle is a host of The Inside Network events, a member of the Advisory Committee and contributor to The Inside Adviser publication.
