Monday Club – 24/02/25: Your weekly Wealthwise digest

Investment round-up

* Fidelity International, Liontrust Asset Management and St James’s Place all feature in the latest ‘Spot the Dog’ report, which highlights those funds that have lagged behind their benchmark by over 5% for the past three years. The amount of assets in these ‘dog’ funds has increased 26% on the previous report in August 2023 – from £53.4bn to £67.3bn. Read more from Trustnet here

* Guinness Global Investors has launched a pan-European equity income strategy to be managed by Nick Edwards and Will James, who run the firm’s European Equity Income fund. Guinness said the launch was in response to client demand.

* 2024 was the worst year for ‘fund manager skill’ in more than a decade, according to analysis from Trustnet, as the information ratio for active managers fell to -0.52%. Only four Investment Association sectors had positive ratios – IA UK Smaller Companies, IA Latin America, IA India/Indian Subcontinent and IA European Smaller Companies. Read more from Trustnet here

In focus: The dying art of ‘buy and hold’?

The length of time investors hold funds has shrunk by two-fifths (40%) since 2016, according to a new report, with the average holding period for equity funds now just four years. The most significant drop was for global equity funds, where the hold period has halved. Is this a sign of worrying short-termism in the market? Or are investors becoming more savvy and discerning when it comes to their investment selection?

The research from fund network Calastone showed bond fund holding periods had also dropped – from eight years to four – with investors responding to shifting interest rates and macroeconomic volatility. The firm put the developments down to investors having a more ‘hands-on approach’, adding it has seen an 80% rise in volumes on its network between 2018 and 2024.

On the one hand, this could be a welcome sign of greater consumer engagement in their portfolios. “Today’s investors want a more proactive role in their portfolios, and they expect seamless efficient interactions with an increasing range of investment options,” noted Edward Glyn, managing director and head of global markets at Calastone. “The challenge for the industry is to meet these expectations without adding complexity or cost.”

Certainly, the ease of trading on platforms and availability of information continue to improve and may have contributed to higher turnover – but, of course, there are other possible interpretations. Many investors have naturally itchy trigger fingers – and they have now been handed the tools to scratch that itch. Risk managers even have a euphemistic name for those most inclined to sell at the drop of a hat – ‘low composure investors’.

Much of the evidence points to the conclusion that shorter holding periods are a more negative sign. Every year, the Dalbar survey illustrates how investor behaviour – in particular, their tendency to move in and out of holdings at the wrong point – tends to diminish their returns over time. The latest results show the ‘Average Equity Investor’ earned 5.5% less than the S&P 500 in 2023 the third largest investor gap in the last 10 years.

Active managers tend to go on a ‘hero’s journey’, argues Simon Evan-Cook, manager of the Downing Fox multi-asset funds. To achieve their high returns, he explains, they need to break definitively with the index and back their judgment. That means their career will have significant peaks and troughs. While investors should be selling at the top of those peaks and buying in the troughs, history – and fund flows – would suggest the opposite.

Read more from Wealthwise: Plan an ‘unheroic journey’ for your investors

This also applies at a fund level. Nick Train, manager of the Finsbury Growth & Income trust, suggests a higher trading approach can be valid strategy – albeit a very difficult one to pull off. “Which is better?” he asks. “Making multiple small gains from a succession of buys and sells? Or enjoying a handful of serious gains – the type where you double or treble your money or better by holding investments patiently, sometimes for many years? There is no correct answer to that question. Both approaches have the potential to be successful or to leave you feeling stupid.

“I prefer the latter course, however – and I do so for two reasons. First, the approach that requires regular trading is more expensive because you are persistently paying transaction fees. Second, I just feel your chances of success are better if you identify a strong business and determine to hold its shares through short-term ups and downs. When you look at the long-term share prices of many household-name businesses, you see that an encouragingly high proportion of them have worked out well for their owners, so long as those owners are patient.”

For his part, Aurora UK Alpha manager Kartik Kumar points to the arguments for higher turnover strategies. “Buy and hold ‘forever’ implies a rigidity we think is unwise for the field of investing, where you are required to make judgements about the future in a world that is ever-changing and dynamic,” he says. “Newspapers were once a great business to be in and that was forever disrupted by the internet. Now we are at the cusp of revolution in artificial intelligence and there is no knowing how that will change and shape certain industries. The future is uncertain.”

That said, Kartik believes investors need to take a long-term perspective, explaining “Many academic studies show there is no relationship between business fundamentals and share prices in the short term. Equities offer perpetual fractional ownership in businesses. This allows investors to benefit from the powerful compounding effect of reinvested earnings over the long term – the proven path to wealth creation in stock markets. Taking a long-term view is paramount.”

His view is that looking longer term forces investors to consider “fundamental business activity”. “By focusing on the returns of a business, an investor is more likely to be able to determine the value of a security, independently of its market price,” he adds.

“This can help avoid overvaluation and take advantage of undervaluation in times of excessive pessimism. Investors with this mindset should be seeking out companies that can earn high and enduring returns on capital, that are run by competent and honest management and that can be purchased at an attractive price.”

There is also a worry that a shorter time horizon on the part of investors will drive shorter-term behaviour on the part of companies to the detriment of economic productivity. A study by McKinsey in 2017 found firms that were focused more on the long term saw average revenue and earnings growth respectively 47% and 36% higher than those identified as more short-term in nature.

“The returns to society and the overall economy were equally impressive,” it added. “By our measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015. We calculate US GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level of our sample of companies that make the cut as long term.”

In this respect, shorter holding periods are concerning. It has not yet led to a discernible pick-up in aggregate volatility – the Vix index remains at historic lows – yet the recent 17% drop in Nvidia in a single day suggests a fragility to the market’s gains. Any erosion of the impulse to buy and hold is a concern.

Read more on this from Calsatone here, from Downing here, from AJ Bell here and from McKinsey here