Instead they second-guess other managers, trying to pick a stock a few days before everyone else buys it, hold it for a few months or less, and then do it all again. Thus they trade incessantly.
On Wall Street the turnover of shares, thanks to computer trading, has gone from two months in 2008 to 20 seconds now.
That is the average time a share is held in total… 20 seconds.
Also, only about 10% of the market is bought by discretionary fund managers in the old-fashioned way.
Instead most strategies are quant and computer driven, looking for price movements but with no understanding of the company, what it does, or why anyone should care. The British market is the same.
There are good active managers out there, but only a few do genuine long-term investment. The others are in houses where the focus is on short-term earnings.
But one of the good guys, Stuart Dunbar of Baillie Gifford, says those who still look for good companies and encourage long termism have to stand up and make their case because many so-called active managers are failing their clients.
“Too much of what passes for active management is simply second-order trading of existing assets, with the main focus being to try to anticipate the behaviour of other investors. This has little to do with actual investing and creates huge amounts of overtrading and volatility,” he says.
“Most investing is no longer about making long-term risks in definable investment projects. It is more about free riding on the mythical ‘market return’ at minimum cost; participating in an expensive zero-sum arms race of better, faster, smarter analysis of markets with the actual companies nowhere in sight; shuffling risks around through financial engineering disguised as value creation; and about confounding and confusing on costs which are often not justified by managers who have lost sight of their core purpose.”
There is more. Dunbar adds that the industry creates structures to measure itself and report on quarterly or annual performance against benchmarks; some investment managers are incentivised on short time periods or even assets under management, while the task of educating clients is ducked.
He says: “It also serves no useful purpose other than for those who make a very handsome living from transitional activity or those who confuse their clients into thinking that short-term volatility is a skill.
“Everybody is trying to outsmart everyone else by buying and selling existing assets… It has little to do with wealth creation either for our clients or society.”
Dunbar is surely right and Scottish Mortgage Investment Trust, one of the FTSE 100 stocks managed by the firm, is testament to that vision. Would that there were more.
