There aren’t many fund management companies that both endlessly engage with companies that they invest in and report their efforts to their investors. First State does.
That makes their comments on everything from executive pay to the morality of the trading background worth reading. I’m currently skimming through their Sustainability Report for 2012. Some of it makes depressing reading. Why? Because it spells out how over the last 20 years “any search to strengthen and nuture fiduciary duty, stewardship or social purpose has been overtaken in the scramble for short-term profits”.
Take the mean duration of the stock-holding period of US investors. In 1940, it was seven years. It stayed seven years for the next 35 years; then it fell. By 1987, it was two years. By 2000, it was below one year. By 2007, as high-frequency trading kicked off properly, it had fallen to seven months.
There is a similar pattern in the UK and in China (where it is about six months). This isn’t good. That’s partly because we know that high turnover is one of the main predictors of bad performance (it increases costs and eats away at returns). But it is also because short-term holders of stocks don’t care about companies: they only care about stock prices – and that is one of the things that has brought us to where we are today (a world of stock options, buy backs and extreme management pay).
So what can be done about this? I’ve written about the various elements of this a good deal here. But the key, beyond regulation, is for private investors to do two things: to engage with the companies they invest in (via voting and writing), and to let the fund management industry know what matters to them – low turnover is better then high turnover, getting angry about high pay for no performance is better than not bothering to vote at AGMs and keeping an eye on the general behaviour of companies is no longer an optional extra.
With this in mind, we return to First State and its list of engagements. There is, says First State, no such thing as “the perfect company in which we can invest our clients’ and our own capital.” But it is the trend that matters. “We engage with companies on environmental, social and governance issues (ESG) for two reasons.
First, because we have a responsibility as part owners in the business to address any ESG issues that arise. Second, because if we can help to address these issues satisfactorily over time, we are able to add value and reduce risk in our portfolios.”
Makes sense. So why doesn’t everyone do it as methodically as First State seems too? Let’s all write to our fund managers and ask.