We’ve seen a number of “star” fund managers coming under the spotlight in the past couple of years having seemingly gone off the boil in their ability to maintain their previously consistently above average performance.
Why’s this? Russell Napier, financial historian and author, makes the case that many of the fund managers in the USA and in Europe that he has spoken to recently are “flummoxed” by this market. He suspects that it is because they have not been trained to operate in this kind of environment.
“The average fund manager will have an MBA of some sort. It will have been based on the idea that all you need to work out is the supply of something and the demand for something. Then you’ll know the right price for it,” explains Napier. “Today…they have to look at supply, demand, policy, central banks, political personalities, central bank behaviour, regulation and the rest. And, not being trained in sociology, they can’t cope with it.”
In other words, theory is not coping with reality. We’ve said before that it is more important to make money (or keep it) than lose it by being theoretically right. Many people in our industry are bound by “modern portfolio theory”, which has of course mostly been evolved throughout the past thirty years or so.
What happens if, as seems increasingly likely, this past thirty years has been a freak? Academics are a dangerous breed because people assume that they’re right (probably because they’re academics), and indeed the academics will not contemplate the notion that they are not right (because they’re academics).
Unfortunately, it takes many years for future academics to come along with a theory that dispels the previous one. And in that time, no end of damage can occur to portfolios bound by the previous rules.
Andy Merricks is head of investment at Skerritt Consultants.