For as long as there have been performance surveys, starting with Bruce Cook’s Mercer Campbell Cook & Knight in the 1980s, short-termism has been a problem for big super funds. They continually tell themselves not to think that way, but it seems, short-termism is very difficult to avoid.
A big international survey undertaken by MFS Investment Management, which included 25 Australian institutional investors, shows that short-termism is a global phenomenon. And, in fact, Australians are not as bad as some others.
Visiting Australia last week for the ASFA conference, Carol Geremia, president of MFS Institutional Advisors and co-head of global distribution for the firm, said that about 70 per cent of Australian institutional investors understood that an investment cycle was at least seven years. Of other big funds internationally, only UK and Canadian funds came close to this view. In the US, for instance, less than 50 per cent said an investment cycle on average was more than seven years. The survey results, covering about 1,000 pension funds and other investors, are expected to be published later this week.
Despite a greater understanding of the average market cycle, those Australian investors surveyed were still willing to change managers within the cycle for underperformance. A total of 68 per cent said they would begin a search for a new manager after only one or three years of underperformance.
Geremia said that MFS had always told clients its objective was to outperform over a full market cycle. Looking back over 100 years of data, MFS research shows, market cycles average between seven and 10 years, “not the three-five year periods that the industry focuses on and seems to be obsessed with”, she said.
Over shorter periods, such as three years, any investor will underperform at some stage. Even the great Warren Buffett, Geremia said, has underperformed about one-third of the time when performance was measured over rolling three-year periods.
“Not only do we not understand the concept of time, we are also creating a global herding mentality leading to instability,” she said. “The survey shows that an important attribute is the consistency of performance. But how important is the turnover of a portfolio when they hire a manager? People say it’s not very important. But how can that be, if we say we are long-term investors?”
The problem of short-termism is likely to get worse, not better, as the Australian industry, alongside most others globally, becomes more and more retail, both within the institutional environment, due to increasing investment choice in big funds, and outside of it with the trend to SMSFs. Numerous studies have shown that individual investors are more likely to react to big market movements in an inappropriate way, by buying high and selling low.
Geremia said short-termism was “pervasive”. The MFS survey showed that eight in 10 Australian respondents said their organisation expected them to generate positive returns over either one or three years.
Furthermore, most – about three-quarters of respondents – said they reviewed the investment performance of their external managers either daily, monthly or quarterly. While Geremia is not critical of such short measurement periods (“all measurement is good”), she notes that the reaction to under-or-over performance in short periods is what matters.
“When you consider the typical Australian investor’s time horizon is measured in decades, it is astounding that performance is being evaluated of periods of three or less months,” she said.
Marian Poirier, a senior managing director of MFS in charge of Australia and New Zealand, says that no-one is saying investors should lock up their money and review it every seven years. It is about trying to understand the risks across the portfolio and the importance of a full investment cycle.
“Australian funds do still believe in active management, as they should,” she says. The MFS research shows that in falling markets, active managers tend to do much better. And the global equities markets have had a seven-year bull run. Now is not the time to go passive, Poirier and Geremia say.
* Greg Bright is publisher of Investor Strategy News (Australia)