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Why the 3-year performance marker should be re-set
Carol Geremia believes investors are coming around to recognising the performance problems associated with short-termism. She likes to quote Warren Buffet: “Time is the friend of the wonderful company, the enemy of the mediocre.”
And, at least in part, the growing recognition and adoption of ESG principals and strategies are helping open investors’ eyes to the superior returns which flow from having long-term objectives.
She believes that the three big conversations investors are having – passive versus active, ESG and short-termism – are all interlinked.
“It’s an evolving message,” she said last week on a regular visit to Australia and New Zealand, from the Boston headquarters of MFS Institutional Advisors, of which she is president. “We continue to talk with clients about improving their alignments with the industry… For instance, is liquid alpha something which is achievable?”
She said that she was not the only one who was outspoken on the short-termism issue. Some of the world’s biggest investors were becoming more outspoken.
In the mid-1990s an investor could get a return of about 7.5 per cent from a conservative portfolio of cash and fixed income. Today, an investor would have to take three times the risk to get the same return, she said.
“So, people are running to passive,” Geremia says. “I think that [active managers] are not being given enough time to outperform. We have not told investors how important it is.”
She believes that in five years’ time ESG will not be called ‘ESG’. It will be called ‘long-term active management’.
She said that she asked client funds and advisors in all of her meetings this trip what they thought was a full market cycle. They all said “more than seven years”, she says, “but they won’t put up with underperformance beyond three years”.
Back to Buffett. His Berkshire Hathaway A shares have returned an average annualised 16.35 per cent between December 1987 (admittedly just after the 1987 crash) and December 2015, compared with the S&P 500’s 10.56 per cent. But Berkshire Hathaway shares underperformed the S&P for one year 38 per cent of the time, for three years 36 per cent of the time, for five years 23 per cent of the time and even underperformed for 10 years once in that period.
According to research by Casey Quirk by Deloitte, top managers over a seven year-period from 2009 to 2016, as defined by those in the two top quintiles at the end, spent between two and four years trailing their peers or benchmarks.
“The industry is hiring and firing active managers at the wrong times,” she says. “You want to pay for counter-cyclical investing, not for pro-cyclicality.
“We have built into trustees’ minds that it is possible to get alpha all the time, but that’s just through trading strategies rather than ownership strategies… Measurement and accountability is critical. Let’s – trustee and manager – be aligned with what our goal is. Let’s not make a three-year marker the destination… I’m encouraged that there is movement in this regard.”
She says that while it is impossible to know where we are in the cycle you do have an idea of dispersions and a general idea of where things are going.
And as if leading by example, the flagship global equity trust for MFS, the firm Geremia joined in the 1980s, just celebrated its 20th anniversary.
– Greg Bright
