Despite the fact that institutional investors have long-term investment horizons, the timescales used to measure fund managers’ performance are too short. According to Julian Coutts, head of quantitative analysis at Standard Life Investments, a gap has opened between what long-term investors want, and the opportunities that fund managers are prepared to take advantage of. He maintained that an opportunity exists to capitalise on views or valuation plays that mature over several years.
“We believe there are some strong opportunities available for funds to take advantage of over the three to five year time horizon,” said Mr Coutts. “Those opportunities have always been there. The difficulty has been that, because fund managers are measured on a short-term timescale, they find it difficult to take advantage of these opportunities.
“If they are incorrect over a short period of time they would show a negative performance track record, so they are nervous about adopting a longer-term investment approach.”
At a time when investors are trying to find ways to quickly identify underperforming managers and replace them, requests for longer time horizons could fall on deaf ears.
“The major concern for clients would be that if [the manager] starts off with a particular idea which doesn’t seem to be bearing fruit after a given period of time at which point do they decide that enough is enough?” he said.
Over the last six months, Standard Life has attracted over £1bn from clients to invest in what they call dynamic market risk allocation (DMRA) strategies, coming from both existing clients and new accounts.
“Institutional investors are keen to get rid of underperforming managers as soon as they possibly can. That’s why the job we are undertaking is a difficult one,” he said. “We have to convince them that being allowed to run positions for longer means that we can take advantage of opportunities that others are too scared to take advantage of.”
He added that consultants in the marketplace have positive views on these type of strategies because they see that effectively “there is money being left on the table”.
PG
