“It is not in doing what you like, but in liking what you do that is the secret of happiness” – JM Barrie 
Being a fund manager is one of the best jobs in the world. We get to meet the leaders of world-leading multinationals, the entrepreneurs behind exciting early-stage companies, and some of the brightest thinkers from a range of disciplines. We help to allocate capital while aiming to deliver the requisite returns for our investors.
Except… it hasn’t really felt like that great a profession of late. At a recent comedy show in Edinburgh, an audience member was asked what he did for a living. His answer of “I’m an investment manager” was received with the type of response last seen on 1980s game shows when a contestant admitted to being a tax collector.
While some of this scorn is undoubtedly just part of the broad-brush ‘bankers = bad’ attitude which emerged post financial crisis; part of it is down to specific, often merited, criticisms of the fund management industry.
Two of those critiques relate directly to the aforementioned roles of fund management: increasing short-termism and the apparent failure of actively-managed funds to deliver acceptable returns.
Unsurprisingly, such concerns typically surface in those periods where active funds have underperformed their benchmark index. So far in 2016, the average fund in the UK All Companies sector is down 2 per cent versus the FTSE All Share, which has increased slightly[1]. Ironically, however, a lack of short-term thinking among investors is one of the reasons that can be used to explain recent underperformance.
Performance of sector vs index in 2016
Source: FE Analytics
Two of the standout sectors during 2016 have been the miners and supermarkets, which have rallied by 22 per cent and 10 per cent respectively. In aggregate, they have contributed almost an entire percentage point to the performance of the FTSE All Share.
While it’s difficult to ascertain the exact exposure active managers have had to these sectors, it’s safe to say that as a group they were underweight. Indeed, in the funds I manage, we had no exposure to either. Such positioning served active managers well during 2015, as the miners collapsed and the supermarkets continued to struggle.
With the benefit of hindsight, do we wish that we had loaded up with Anglo American, Glencore and Sainsbury as they troughed in January? Of course!
Fund managers are ultimately judged by their performance and it always hurts when the market moves in a way that doesn’t suit your portfolio. For the long run, though, the focus has to be on an investment process that can deliver sustained outperformance and not short-term noise. The ‘Hindsight Opportunities’ fund perennially tops performance tables.
We continue to be cautious on the outlook for the mining sector, as we think the longer-term supply and demand dynamics remain unfavourable. The UK supermarket space continues to be intensely competitive with the listed players facing challenges at both the discount and premium ends of the market.
Performance of sectors vs index over 2016
Source: FE Analytics
The rallies seen this year in both sectors can be attributed to short-covering (both sectors were popular shorts for hedge funds) and a correction from extreme levels of negative sentiment. The longer-term challenges for both sectors are unchanged and we remain content to sit on the sidelines.
Investors are right to ask questions of the fund managers they employ to look after their money; in the same way that fund managers should ask questions of the management of the companies they invest in.
Recent debates on the fees charged by active funds and ‘closet-benchmarking’ are welcome steps to bring more transparency to the industry as a whole. The performance of these funds, however, should be judged over a suitable time-frame and not on a volatile few months.
There are a number of funds whose track records over lengthy periods demonstrate an ability to add value for investors. They will clearly not outperform the market in every environment, a skill sadly limited to those with perfect foresight.
Hopefully, though, the managers will feel able to proudly state their profession in public once again and not have to pretend to be something less embarrassing, like a traffic warden.
Neil Veitch is manager of the SVM UK Opportunities fund. The views expressed above are his own and should not be taken as investment advice.
