I’ve got at least as much against the average fund manager as anyone else. I’m irritated by the way their industry overcharges us and, of course, by the endless closet benchmarking that still passes for active management across much of the sector. And I wish the ones who held very large bank portfolios had paid a little more attention in the run up to the crisis.
But even so, I’m not sure I really agree with Sir Terry Leahy’s criticism of them in today’s Times. Sir Terry complains that most managers have a short-sighted aversion to risk, that they “don’t want to get under the skin of an investment” and that they don’t have the patience for “long-term value creation”. He wants them to be less like he thinks they are and more like Warren Buffett.
He also has a go at them for churning their portfolios – in the 13 years he has been chief executive of Tesco, he says, the market capitalisation of the company has been “traded more than 15 times and that is low compared with most FTSE companies.” In Sir Terry’s world, managers invest “many years” in a company, but investors fail to do the same.
But does the fact that the market cap has been traded 15 times tell us that fund managers are short term? I suspect not. The vast majority of long-only UK managers have large holdings in Tesco. These are holdings they might tweak for technical reasons – buying or selling to maintain the holding at the same percentage of their fund, or in the case of unit trusts, as investors take money in and out. But they aren’t holdings that are being fully sold or bought – ever. If they were, we’d all stop complaining they were index trackers in disguise.
Sure there are trading funds that buy and sell fast all the time, but it doesn’t follow that all fund managers are short term traders. Far from. In fact most fund managers either are, or are trying to be, exactly like Warren Buffett. I’ve interviewed many more fund managers than I would have liked to over the years and I can count on one hand the number who haven’t told me that they are constantly on the look out for Buffett-style value and that they focus on good stocks to hold for the long term (subscribers in any doubt should look at last week’s interview with Michael MacPhee). The fact that they can’t very often seem to find them is a different matter – Sir Terry isn’t railing against stupidity, just against intentions.
Finally, as to engaging with managers, Sir Terry says he has wonderfully stimulating meetings with the likes of Berkshire Hathaway. But I wonder how he would really feel if a couple of 30-something fund managers from Standard Life popped in on a regular basis to tell him where he was going wrong.
It all leaves me wondering if Sir Terry is after quite the right target. After all, if there is any one sector of the business world that appears to have become significantly more short-termist in the last decade – what with its share-price-dependent incentive plans – it is large company management.