Asset managers may not be capturing enough of the available information about the companies they invest in, according to a paper issued by the influential Marathon Club, the London-based collaboration of pension fund trustees and industry specialists on long-term investment issues. In a practical guide for trustees on issues to be learnt from the credit crisis, titled: Behavioural Aspects Of Investment Management: Lessons From The Credit Crunch, the club draws a number of conclusions. One is that fund managers are too reliant on normal channels of information such as company reporting, earnings per share (EPS), and preliminary result announcements. As a result, it says they may be failing to capture what it calls: “submerged information” that could be drawn out from more thorough long-term research and risk appraisal. A discussion paper written by Colin McLean, managing director of SVM Asset Management for a meeting of the Marathon Club, noted that many analysts focused on standard sell-side stock buying signals such as director share purchases and dividend prospects, but questioned how many, for example, had looked at Northern Rock’s lending model as a potential risk to the business before the company was bailed out by the UK government.The report invites trustees to ‘test’ their fund managers on their research approach. It also questions whether fund managers are taking into account what it calls “misaligned incentives” in the companies they buy such as non-core businesses lines being retained for internal vested interests. It says it may be possible in such cases to create shareholder value through a more active policy of persuading companies to spin-off or restructure parts of the business. Company reporting, the report says, is another area where investors need to probe to ensure that selective data is not framed in a deliberately positive light or cherry-picked. Investors, it says, should test company reports by comparison with peer group information or the views of other credit and equity analysts. Notably, the Marathon Club warns that the potential for mis-pricing of companies as a result of such research shortfalls could leave quantitative and passive investment approaches with little protection through being unable to sell. It said that as a result trustees would do well to look at the ‘price environment’ when evaluating manager performance or considering the strategic balance of their portfolio.
In the paper, The Marathon Club, which represents combined fund assets in excess of £170bn, also
challenges what it calls “a common perception, especially amongst investment managers,” that pension funds still act short term. It said evidence on the duration of fund manager appointments and the club’s own experience did not support the view, although it noted that the standard practice of quarterly reporting of manager performance had created this perception. It has recommended that trustees review manager performance less frequently, but in greater depth, while still keeping quarterly or monthly updates on file. It has also recommends that trustees focus less on relativemarket performance and more on absolute return characteristics.
Yusuf Samad, secretary to The Marathon Club, commented: “The recent dramatic failures of financial institutions and the stress suffered by some of the icons of the corporate world have shown that an investor’s investment considerations need to be broader and more inclusive in their scope. Investors are duty-bound to seek out ‘submerged information’, not simply to be spoon-fed by companies.”
Link to report