Investing is difficult. I think the task of a UK fund manager being asked to put forward a diversified portfolio of 25-30 shares that can beat the market and importantly grow the buying power of its investors’ savings is extremely difficult.
In my view, the UK market faces a dearth of high quality businesses that have sustainable growth prospects. I have written before that the FTSE 100 offers a menu of shares that I’d rather pass on with very few exceptions.
To beat the market you have to have a portfolio that doesn’t look like it. This is where many professional fund managers go wrong. The thing is, it’s not their fault. They are told not to stray too far from the benchmark as if their judgement is wrong they will underperform the market and customers will withdraw their money and destroy the very profitable economics of fund management companies.
This puts the managers in an uncomfortable straightjacket and on the road to mediocrity because they have to own so many mediocre companies. Even those who are given the freedom to follow the courage of their convictions and have a truly differentiated portfolio are only given the support to do so if they are winning. Short-term underperformance with a high conviction portfolio needs the support of your employers and sometimes plenty of patience.
It is no coincidence, in my view, that some of the best performing UK fund managers in recent years such as Mark Slater, Nick Train and Keith Ashworth Lord are essentially their own bosses. Managers such as Giles Hargreave and Richard Watts have done a great job working for someone else.
If you are a UK value investor then life has been very difficult. This is because many shares that are seen as being value aren’t - they are bad or average businesses which deserve to have inexpensive shares attached to them.
At the moment, the cheap shares of businesses whose frailties have been exposed by Covid-19 are rallying strongly whilst many expensive shares of better quality companies are selling off.
Hopefully, a vaccine will allow many businesses and people to get back to normal sooner rather than later but I think investors need to tread carefully when it comes to cheap, battered shares.Download PDF