One of the oft-cited statistics of recent years has been the decline in the holding period of shares, from more than eight years in the 1960s to less than a year some 50 years later.
Part of this short-termism reflects growth in high frequency trading. The Kay Report released in 2012 and commissioned to look into the state of the UK equity market and long-term decision making, included the data shown in the chart opposite, which revealed that hedge funds, high frequency traders and proprietary traders are responsible for 72 per cent of UK market turnover.
Conflicting data
Yet the CFA Society of the UK notes that average stock holding periods are likely to be underestimated because of the way they are calculated, highlighting the following worked example. Assume that there are only two classes of investor, types A and B. Assume that investors of type A own 20 per cent of the outstanding equity of all companies and hold shares for 20 years on average. Type B investors own the remaining 80 per cent of equities and hold shares for three months (¼ of a year) on average. The average holding period is (0.2% x 20) + (0.8% x ¼) years = 4.2 years.
They note that other commentators, however, might observe that every year the total market experiences turnover of 20 per cent of 5 per cent (once every 20 years, so one twentieth) plus 80 per cent of 400 per cent (every three months, so four times a year) which is: (20% x 5%) + (80% x 400%) = 321%. From this, they will wrongly deduce that the average holding period is less than four months, as opposed to the correct figure of 4.2 years. The longer holding period appears to have more credibility. In a report to the UK government, Aviva noted that the average holding period for long only funds has varied from 29 to 46 months, so much longer than the much-bandied sub-one-year figure.
Avoiding the noise
While some funds seek to exploit daily price movements, most fund managers take longer-term investment decisions and tend to avoid high turnover to keep down costs. As Richard Pease, Manager of the Henderson European Growth Fund, explains: "We invest for the medium term, seeking to highlight catalysts and positive trends in companies that will drive up share prices over time rather than be buffeted around by day-to-day newsflow. What we look for are fundamentals such as attractive valuations and growing earnings that give us confidence that the share price will move in a generally upwardly direction."
This echoes the sage words variously attributed to celebrated investors Benjamin Graham and Warren Buffett, who said that "markets are like a voting machine in the short term and a weighing machine in the long term", i.e. stocks might be volatile in the short term but valuation will out over the long term.
So are all the quarterly reports that companies produce superfluous? While some managers believe that they add value in terms of providing more timely information about a company, others are more dismissive. John Bennett, Manager of the Henderson European Focus Fund, notes: "Quarterly reports are a waste of time and energy because no company is run on a quarterly timeframe. It's as meaningless as fund manager performance being measured quarterly. It has led to a silly phenomenon known as earnings 'beat' or 'miss' and creates nothing but noise. Annual company statements, particularly the cash flow statement, are much more meaningful."
It is not just fund managers that have misgivings. Business leaders have voiced concerns that quarterly reporting detracts from long-term business goals. So much so, that some companies such as Unilever, the consumer staples company, in 2010 and Reckitt Benckiser, the household goods group, in 2012 ditched quarterly reporting altogether. Neither company appears to have been penalised, with their shares up substantially since.
Patient investors
Fund managers may be minded to invest for the long term but do investors let them? Private investors seem to be forgiving to judge from the amount of money that resides in underperforming funds, although there is no shortage of commentators keen to highlight industry dogs.
Interestingly, Warren Buffett's investment company Berkshire Hathaway is famous for holding on to its mistakes, making a commitment to sellers of businesses that they buy that they will retain those businesses through thick and thin.
Bill McQuaker, Head of Multi-Asset, who heads the team responsible for Henderson's multi-manager funds and invests in funds across the industry, is more circumspect but agrees that a little patience can be rewarded. He explains: "We are normally patient with fund managers so long as we have confidence in their investment process and their fund meets our asset allocation or style requirements.
"No manager is going to be number one year in year out. In fact, it tends to be the case that those managers who are most successful over the long term will have the odd poor year but generally hover between first and second quartile each discrete year.
"What this means is that as the years compound, they are ahead of the peer group average, so incrementally they rise up the leader board."
Richard Pease is Co-Manager of the Henderson European Growth Fund, John Bennett is Manager of the Henderson European Focus Fund, and Bill McQuaker is Head of the Henderson Multi-Asset team.
