Is short-term thinking damaging your clients’ portfolios?

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Investors are continuing to focus excessively on short-term results at the expense of long-term interests – tipping the balance in value-destructive ways for market participants and discouraging long-term value creation and investment.

These are the thoughts of Shaun Manuell, CIO at Equity Trustees Limited (EQT). He has suggested that  such short-term strategies are a root cause of market volatility and will feed into a cycle of further volatility.

“Equity markets are cyclical and the most likely outcome is that market will improve over time; however many investors’ current asset allocation does not match this longer term outlook as they are focussed on short term loss of their capital,” he said.

He argued that such short-term strategies are too often based on profit maximisation. This, Manuell believes, is a knee-jerk reaction rising from a worrying decade of poor returns on equity investments, but it fails to fully reflect the complexities of investment – as well as the significant opportunities and risks associated with these strategies.

He added that short-termism is certainly not confined to Australia, and is a worrying global issue evidenced by last week’s release of the Kay Review of UK Equity Markets and Long Term Decision Making, which concluding that “the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain”.

Many of the report’s findings are relevant to the Australian market, he added, and argued that EQT’s Wholesale Flagship Australian Equities Fund has been implemented to “differentiate ourselves from our peer group”.

EQT’s new flagship structure enables current and future investors to select a fee option that reflects their view of potential performance; a sliding scale in recognition of its importance in the fund manager selection process.

“However, the primary consideration in selecting a fund manager must always be what return is the fund manager targeting and what risk is being taken to deliver those returns. The next consideration is ensuring the fund manager has a robust and logical investment process backed by a skilled and stable investment team,” said Manuell.

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