The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.
High frequency trading, short selling, smart beta: A glance back at the investment landscape in the past decade shows that complexity, knee-jerk reactions and short-termism are everywhere. The trend baffles Stuart Dunbar, who believes we’ve forgotten the true reasons why we invest.
“The purpose is to deploy capital wisely into investment projects, in the hope and expectation of long-term positive returns, which can be paid back to those who invest in the first place”, he asserts. “That is very different from what most people would say these days: that the purpose of investing is to outsmart other investors.”
Dunbar traces current bad habits back to the point where stock market analysis took precedence over considered allocation of money into enterprising projects. And he suggests that further confusion has arisen from the active-versus-passive investing argument.
“There’s a very unhelpful simplification in that debate. Rather strangely, I’m not anti-passive. In fact, I admire some of the big passive providers. I wouldn’t necessarily describe what they do as investing, not in the pure sense, but they provide broad market access at low cost”, he adds.
A big problem, he believes, is that some active managers overvalue their services, eliminating the gains of those who deliver marginally positive returns. By the time the client has paid the costs, the result is often the same outcome that could have been achieved without an active manager.
“Our industry has a problem with charging clients. Not so much charging too much, but, taking too high a share of whatever value has been added”, he points out. “Many active managers outperform a little bit, but then essentially take it all back in fees. You’d be better off with a passive manager in those instances.”
Studies showing that the average active manager underperforms after fees promote the benefits of passive investing. But this ignores the substantial returns that can be generated by an above-average active manager. It also applies the term ‘active’ to those who charge fees for managing a portfolio yet stick closely to the benchmark index – the worst possible combination of active fees and virtually passive investing.
“The two strong signifiers of active management done well are low turnover and high active share, active share being the level to which we differ from an index”, says Dunbar. “Active share – or divergence from an index – suggests to me, again, that these are managers who are not starting by mechanically looking at and then culling stocks from the whole opportunity set. These are managers who are trying to find great ideas.”
To avoid being caught up in the active-versus-passive debate, Baillie Gifford has taken steps to emphasise the traditional investment process by applying the label, ‘Actual Investing’, the alternative to simply trading in the stock markets.
“It’s quite interesting. We’ve started to describe what we do, as opposed to the other way around, where others latch onto a phrase and alter their story to fit it”, he adds. “’Actual Investing’ is just a summation of everything we’ve been talking about. It’s a focus on wealth creation, capital deployment, working with management, leaving the value for the clients rather than taking it for ourselves, thinking long term and being pretty much indifferent to share prices.”
While these fundamentals are at the heart of Baillie Gifford’s investment process, one area where the firm is purposefully moving away from the long-established approach is in research, particularly through its use of academic institutions as a source of differentiating information. Dunbar sees that as a key element in creating better outcomes for clients, especially when combined with good analysis from traditional sources.
“There’s a danger here that we’re overly dismissive of others. We’ve spoken about what we at Baillie Gifford mean by investment, and it’s not share prices. We’re not some sort of geniuses, the only ones to have worked this out. There are some good researchers at investment banks. You just need to know who they are”, he states.
“We tend to be interested in those who write longer-term perspectives. We’re really not interested in somebody’s spreadsheet about a company’s earnings next quarter. But there are smart people out there.
“It’s important to be humble, actually. You always have to remember, you might have been lucky rather than smart. Probably we’re not, but let’s not get carried away with ourselves. One of the big reasons, I think, we’ve been successful, is our willingness to learn from people who are smarter than we are.”
By focusing on what actually matters about companies, Dunbar suggests, the investor can unlearn the unhelpful habits and practices accrued by the industry over the years. These, he believes, have stopped colleagues from seeing what the job was all about, let alone from fulfilling it to the full benefit of clients.
You can listen to our podcast here. Words by Colin Renton
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.
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