If the dirty secret be told, most of the major equities funds managers do little more than ride the broad market, never straying too far from the index and hoping to just do a little better than the average to justify their fees.
Their attention span is no longer than the current year’s performance tables, and sometimes just this month’s.
Which is why most of them are easy prey for private equiteers who can think as far ahead as three or even five years. That qualifies as “long-term” thinking nowadays, such is the spread of ADD.
But there are intriguing signs that a few funds managers just might be thinking further ahead about how very pedestrian they will look when markets revert to somewhere near the mean.
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The easy days of being made to look good by a market that jumps 20% a year won’t last forever – and when it’s back to averaging 7%, the management fees will be much harder to justify.
With the Flight Centre privatisation killed off by one insto, the Rebel Sport privatisation going down to the wire on Thursday and not looking good, and the market increasingly unsure that the Qantas bid will get the necessary 90% by 3 April, the tide does seem to be turning.
The case for longer-term thinking was well put by Capital Partners’ Peter Doherty last year when opposing the ASX’s SFE takeover. Doherty argued that there is a real shortage of good companies with sound management and a long term future. When a smart investor finds one, he or she should buy and not let go.
In any takeover, there’s generally a bit of poker being played on the side, games of bluff in an effort to extract a better price or a particular favour. But it seems we’re now seeing some genuine investment thinking instead of market trading.
Consider for a moment that you’re a equities fund manager, paid handsomely for investing the savings of countless small punters. When you’re making them 20% a year, in line with the index, they don’t even notice you’re clipping their ticket.
If the index (and you) only does 5% next year though and inflation is 3%, suddenly you and the product salespeople and the other ticket clippers are taking more than half of what the punters really make. And it can be much worse than that.
How much better might you look if you managed to buy and hold a company with strong performance and a good growth story that would return increasingly profits over several years and never mind the stock market not doing much? You might think that could be an insurance policy against less easy times.
Most funds managers don’t. They want the immediate gratification and short-term performance lift on offer from the private equiteers and are happy to exchange the medium and “longer” term growth story for it.
Most, but maybe not all. The handing over of Qantas doesn’t happen if just one share more than 10% doesn’t accept the $5.45 a share. Most of the instos rolling over now are doing so in the expectation that they will buy the airline back for much more in an IPO a few years down the track, giving the private equiteers a rich profit in the process.
But there are several annual performance bonuses to be paid before then and in a few years it could be someone else’s problem.
It promises to be a very interesting run up to 3 April.