Short term focus has undermined global investment returns

The average holding period of stocks has declined to six months, down from five to six years in the 1970s and closer to 10 years in the early 1940s, according to research from Societe Generale. This indicates that fund managers are using short-term news flow and day-to-day market movements as a basis for investment decisions, and is part of the reason why the average global manager has underperformed the market over the long term, according to Orbis, Allan Gray’s global asset management partner.

Speaking at an investment update in Cape Town, Orbis analysts Jonathan Brodie and Trevor Black said there are many ways to make money and many successful managers, but history shows that, on average, managers often place too much emphasis on short-term news at the expense of long-term analysis.

“Holding a stock for only six months is too short a time to analyse anything more than market noise; it is important to give an investment thesis time to play out,” they said.

Like investors, managers tend to be driven by emotion and may define risk as being different. This is why, on average, managers tend to hug their benchmarks, holding similar shares in similar proportions to their competitors. This is done to avoid the risk of being wrong; the risk that the market might move against you. It typically results in a low ‘tracking error’, i.e., a low instance of moving in the opposite direction to the benchmark, which appeals to institutional clients in particular.

“How you define risk is critical. Most traditional measures look at risk as the chance of being different, or more volatile than, other managers, whereas it should be defined in terms of permanent capital loss. It’s an error to mimic the market,” Brodie and Black said. “It’s important to focus on what can go wrong, on looking for a margin of safety and on the valuation risk, earnings risk and balance sheet risk of specific holdings.”