Special to the Globe and Mail
Published May 27, 2015
By Tom Bradley
"Tom, I’m going to be in Vancouver. Can I come in and discuss how we’re managing low volatility equities? So far this year, the portfolio is up 14 per cent, and it’s 5 per cent ahead of the composite over the last year."
This is an actual voice-mail message from a money manager who wants to manage a fund for us. Unfortunately, this individual couldn’t have done a poorer job of piquing my interest. His teaser was guaranteed to turn me off.
It never ceases to amaze me how an industry filled with intelligent, well-trained people can spend so much time talking about short-term returns and market moves. Investment professionals do it even though when pressured they’ll admit that what a security or portfolio does over a week, month or quarter is meaningless. It amounts to an inconsequential squiggle on a long-term chart.
It’s one thing to report on how a fund or portfolio has done over the last quarter (it’s expected), but quite another to present it as being important. Returns of less than one year can in no way be attributed to a brilliant or flawed strategy.
"Short-termitis" is not limited to those working with individual investors. In institutional presentations, I regularly see multiple pages of performance attribution, showing in detail which stocks and industry sectors contributed to the three-month return. The uselessness of these pages is regularly revealed when the stocks that led the way one quarter show up on the other side of the ledger the next quarter.
What makes short-termitis worse is when it’s combined with "best number" syndrome – advisers and portfolio managers chronically emphasize the most favourable returns on the page. This means talking short-term when those numbers are good and long term when the short term is poor.
The best-number approach is intellectually dishonest, and more importantly, it distracts clients from what they should be focusing on – strategies and returns that match up with their objectives. Most clients, even those well into retirement, are long-term investors (money that has a time horizon of just a few quarters should be in a savings account at the bank, not invested in the stock market).
This best-number practice also hurts the adviser’s credibility. Clients aren’t always well informed, but they’re not stupid. They pick up on it when their adviser or manager is jumping around from meeting to meeting.
Why is the investment industry so bad at this? (There are many exceptions of course.)
In the case of short-termism, it’s partly because the clients take us there. In this instant gratification world we live in, clients want to know what we’ve done for them lately. "I was down last quarter. What’s that all about?"
But there are other reasons. For one, we fall in love with our attribution software. With the push of a button, we can generate a wall of numbers. It’s impressive, even if it’s meaningless.
And of course, human nature points us toward the positive and away from the negative. We always want to put our best foot forward.
So if the wealth management industry can’t help itself, what can you do to protect yourself from short-termitis and best-number syndrome?
In general, you need to stop letting your advisers and portfolio managers get away with it. That means taking a more active role at your review meetings.
"I see my return from the last year was quite good/bad. Am I on track to achieve my long-term objective?"
"How much of the return was from the market and how much was our execution? How would I have done if I’d had an index portfolio?"
"What is the long-term record of this strategy/fund?"
"What are the prospects for returns over the next five years based on my asset mix and your view of future market returns?"
It’s going to take a while to find a cure to these afflictions, but I look forward to the day when I get the following message on my voice mail. "Tom, our short-term numbers suck, but I think you’ll be impressed with how our philosophy and process has created wealth for our clients over the long run." A bit of a mouthful, but very effective.