Mark Knopfler-based investment analogies don’t crop up very often so let’s start there. Federated Hermes Limited CEO Saker Nusseibeh – a self-confessed “really bad guitar player”, who used to busk while at university in London – mentions the six-string virtuoso and former Dire Straits frontman as he highlights a fault-line between asset management’s twin commercial imperatives of attracting new clients and doing right by existing ones.
“There is a tension between what businesses often think – that they need to attract clients by acquiescing with the general belief trading is the way to make money – and what most people in the industry instinctively know, which is that trading actually does not make you money,” he says. “The ‘hit’ ratio for trading – and certainly many academic papers have shown this over the years – is so bad.
“To really make a difference in our industry, you have to invest for the long term – 10 years should be your time horizon – but that often goes against the approach of the consultant and fund-picker communities and anyone who only looks at three-year and one-year numbers. And where I worry about this tension is that it is only the very privileged who end up being on the right side of it as they are able to sit on very long-term strategies.
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“Meanwhile the less privileged are encouraged to chop and change and focus all the time on short-term returns and short-term fees – as opposed to net fees, risk-adjusted – or they get pulled down the road of beta through index funds. To be clear, there is nothing wrong with index funds but, as my predecessor Ralph Quartano worked out 40-odd years ago, the whole point is you need to engage with the underlying stocks.
“Now, clearly some asset managers can make money by short-term trading but that skill is rare – and skill is the issue, right? It is the same with music. I mean, I play the guitar – really badly! – but there are only a few truly skilled guitar players in the world. If you have ever listened to Dire Straits, you know Mark Knopfler is really playing – but there is only one Knopfler.
“Yet most of the asset management industry is essentially saying, Oh, anyone can be Mark Knopfler – that investors can just follow the prevailing market view that all you have to do to make money is trade different funds from time to time – when, in reality, the ability to do that successfully is extremely rare and everyone should be looking to invest over the long term.”
Read the rest of this article in the May issue of Portfolio Adviser magazine
