A common complaint among fund professionals is that investors can be their own worst enemies: they sell stocks only after a catastrophic price collapse; and they are only interested in a new investment after everyone else has already pushed the price up.
By all accounts this behaviour has been getting worse in recent years, and it’s damaging to both investors and the investment industry as a whole.
This is the view of global head of institutional and wholesale distribution at Nordea Asset Management, Christophe Girondel.
“People are becoming more short-sighted,” he says, and the culprit is the ever-present technology-led flow of information.
“Fifteen years ago, you didn’t have access to all this data. You didn’t have Twitter, you didn’t have technology telling you the price of everything. [Therefore] investors could have a much more long-term view.”
As Girondel sees it, one of the jobs of investment professionals is to help the client think more long term, especially when it comes to using funds.
“Mutual fund investing is not trading,” he says. “Some of our investments have a time horizon of three to five years. But clients less and less want to hold their investments for that long. They look after six months and decide ‘Oh, it’s not working the way I want it – I’ll change.’
“Some clients switch funds very quickly but over the longer term that’s generally not a good idea. By abruptly switching products, they often enter the new product at just the wrong time. And this trend is getting worse.”
So, what should you do when a fund you own is underperforming? First, you need to remind yourself that all funds underperform at times, Girondel argues, pointing out that underperformance isn’t, by itself, a reason to sell.
In this situation you need to ask yourself why you bought that product. Are the investment reasons for owning it still relevant? If they are, then perhaps it’s best to grit your teeth and hold on to the fund for the recommended three to five years.
Along with this increase in short-termism, another recent trend has been the move to alternative strategies, particularly anything run on an absolute return basis, such as unconstrained bonds and hedge funds.
In the past year, however, that trend has slowed and, in certain strategies at least, started to reverse.
Investors are now seeking out fresh alternatives. The strategies du jour are much more illiquid, such as private equity, private debt, infrastructure and direct property. Girondel recognises this trend but warns there are some potentially serious problems associated with it.
“On the institutional side we have seen big moves into illiquid assets and private debt. These clients have moved more into the illiquid space because they feel they can get a better risk/return for their portfolios.
“On the wholesale side, however, this is less true because illiquidity is still a problem for many clients. It’s not yet very big in terms of sales because the mass market still can’t afford to be illiquid for three, four or five years.
As the charts illustrate, both private equity and private debt markets have expanded significantly during the past few years, especially private debt (see Charts 1 and 2).
But they are still both peanuts when compared with the other mainstream asset classes. Illiquidity might be a problem for smaller investors.
Does that mean it is a question of finding suitable vehicles for these clients? “It’s always going to be problematic because I don’t think you can fake liquidity. If you look back at history, people have tried this many times,” Girondel says.
He recalls when funds of hedge funds became massively popular. “Everybody was making those products but when the crisis came, the liquidity that was supposed to be quarterly disappeared.
“I’m afraid people are trying to do the same again with other illiquid assets. They are not hedge funds now; they are private assets or whatever.
“Some people have launched private equity products with better-than-quarterly liquidity and that is all fine as long as the market goes up and private equity is going well.
And even the private clients will tell you private equity is great. But the problem is that people panic when things go wrong.”
And when investors panic, investments can quickly become toxic.
It’s not that Girondel has a problem with the underlying investments. In fact, he thinks there is value there, partially because there is an illiquidity premium. But trying to cater to the liquidity demands of the mass market by structural tinkering with the investment vehicles is not the way forward.
One solution some private banks have been trying is to take a large portion of an illiquid asset and then provide the necessary liquidity. They achieve this by matching buyers and sellers among existing clients.
“The private bank then becomes the market maker,” Girondel explains. “But they have to be prepared to take the assets on their books. Some banks can and that is definitely a way to make it work.”
However, Girondel believes a more fundamental change needs to happen before clients can fully utilise these types of investments: they need to stop being so obsessed with liquidity.
“All of us should work together to convince clients that having daily liquidity is not necessarily good for them. I understand it’s a difficult discussion because I have also met some end clients, not least in my own family, and I know how they can react.
“The reality is people don’t need the money every day; monthly would be enough. Daily liquidity has become ingrained in our industry and if we worked together to change that, it would benefit everyone.”