Being a Leicester City football fan is a rollercoaster. Since I started supporting them in the early 1990s, we’ve been relegated or promoted nine times, won the Premier League, Championship and League 1 (the top three divisions), the FA Cup and the League Cup (twice) and I think we’ve been to Wembley ten times over that period if I’ve counted correctly. It’s been busy. This season, after spending the majority of the season in the top four places in the Premier League, which would earn us a lucrative spot in the Champions League next season, we ended up finishing fifth, so we missed out. The reaction has been interesting; some fans have been very upset and angry about missing out whereas others are grateful for the joint 5th best season ever together with the first FA Cup win in our history. Was it a successful season or not? It made me consider why there has been such as disparity in views and how it compares to investments. What is deemed a success in investment management?
Success is often an emotional feeling and reaction. That emotional reaction only comes about because you have an expectation, which is met or exceeded with success. However the emotional reaction to success is usually short-term and small compared to the emotional reaction to failure, as the Nobel-prize winning psychologist, Daniel Kahneman points out “People put much more weight on losses than gains. People hate losing”.
Football has clear parameters on what is success (winning the league/cup or getting promoted) and what is failure, which could be seen as anything other than winning the league/cup, however it is usually associated with relegation. Investment management doesn’t have the same parameters. This is why we combine financial planning with investment management as within financial planning we create client objectives and expectations. Once we understand the financial planning objectives and expectations, we can then build and manage appropriate portfolios, which is why all of the objectives of our portfolios are outcome driven (usually using inflation). We can then ensure that the portfolios are being managed with a clear expectation of risk and return.
I suspect most people think that portfolios are managed with a specific, clear expectation of risk and return in mind. I looked at the five largest multi-asset funds in the Investment Association’s Mixed Investment 40-85% Shares sector (this used to be called the ‘Balanced’ sector), which have a combined £32.5bn under management. None of them have outcome derived objectives. Some of the objectives are “The fund aims to achieve capital growth over rolling five-year periods” and “The fund seeks to achieve income and/or capital returns”. They are so vague that they don’t mean anything to anyone. As an investor you can’t build expectations as you don’t know what to expect. This means that you can’t measure success.
I think part of this comes about because some investment managers are terrified of having absolute targets and clear objectives. Their concern is; what if the targets aren’t met, will we get sacked? I appreciate that the majority of return comes from the market (rather than the manager), however most investment managers should be capable of building portfolios with appropriate levels of risk and have a good idea whether the portfolio should be capable of delivering returns of 1% or 20% per annum. Without clear objectives and expectations there can be no feeling of success, or failure, which I suspect is the driving force behind the vague objectives – it’s much nicer if you can’t be accused of failure.
Kahneman says that “gains and losses are short-term. They’re immediate, emotional reactions.” Linked to that is the point he makes that people think of the near future far more that the distant future and changing perspective from not wanting to lose tomorrow to willing to obtain long-term wealth significantly alters our behaviour. This is what we do. Sometimes it’s education that we provide, sometimes it’s providing belief, however most of the time it is to provide a framework and plan to make things happen, backed up with the expertise to make sure it is executed, reviewed and updated.
I think Leicester City did have a successful season, maybe because my expectations weren’t as high as others. However, I still had the short-term disappointment of not finishing in the top four positions on the last day of the season. Investment management, like football, has highs and lows and success is not determined by one result or one good or bad day. We believe it is important to set clear targets and objectives, which is what we judge success by, highlighted by JFK’s quote in our brochure; “efforts and courage are not enough without purpose and direction”.
Thanks for reading and