Bye-bye buy-and-hold

Bye-bye buy-and-hold

April 28th, 2010

Departures and other news in recent weeks involving some high-profile fund managers have once again raised the debate of ‘star’ versus ‘team’. The battle-lines have been well-rehearsed. Stars can leave, can have personal problems, can endure periods of poor performance, but investors can benefit from a skilled manager unconstrained by benchmarks or committees. Equally, at its best, the team approach can generate more consistency and benefit from smart managers bouncing ideas off each other – but it can also lead to weak, consensus-based decision-making. In general, the numerous articles on this subject tend to draw the rather tame – but almost certainly true – conclusion that very few companies genuinely have ‘stars’ and very few genuinely have ‘teams’. Stars need the right environment to help them perform, whether that be the right systems, the right analysts or the right colleagues. Equally, teams have to have a couple of stars in their midst to ensure they avoid consensus decision-making and weak outcomes. But there is another, less considered angle in this debate and that is whether the ‘buy-and-hold’ model of investment has in fact become obsolete. The question of whether it is worth sticking with an underperforming manager or a fund where the manager has left is only relevant when it is onerous and/or expensive to switch. It also feeds into the myth there are ‘managers for life’ – those rare creatures you can invest in for decades and who will provide you with year in, year out outperformance. Ultimately, history suggests there are a few managers who will remain top quartile over any sustained period of time. For the most part, however, there are managers who are very good in some markets and very poor in others. Even the best managers will have times when you would rather be invested elsewhere. The idea of the manager someone can buy and forget about is unrealistic. Investors and their advisers always have to keep on top of their investments. Fortunately – with the advent of platforms and/or fund supermarkets – it is now much easier to switch between funds. This has also brought down the cost. Seldom are there managers so good that a reasonable alternative cannot be found. A lot of energy is expended in ensuring a manager is properly incentivised to stay in their current position but, while it is inconvenient and distracting for a manager to move, it simply may not be such a consideration in this new era. Of course, it is still worth picking managers with skill who look like they might be around for a while. But expecting a manager to spend their career at one company or outperform in all conditions is unrealistic and investors need to be aware of the investment environment. It may, finally, be time to let go of the dream of the buy-and-hold manager. For an in depth view of your investments please contact Mark or Clare at GMP Independent Financial Advisers LLP

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