Wednesday, 10 February 2010

Long-only short-termism

Hmmm... this (PDF) looks very interesting. The stats:
The key findings of the quantitative analysis include:

• Nearly two-thirds of strategies have turnover higher than expected, with some strategies recording more than 150-200 percent higher turnover than anticipated. Of the 822 strategies for which Mercer had expected and actual turnover information, 55 exceeded the turnover during the sample period. The average turnover was 26 percent higher than anticipated.

• Within the entire sample of 991 strategies, the average annual turnover of the sample is 72 percent, with some 20 percent of strategies having turnover of more than 100 percent.

• Value managers tend to have a lower annual turnover figure than the other style types. Large capitalization portfolios have lower turnover rates than small capitalization strategies, and socially responsible investing (SRI) strategies have lower turnover than non-SRI strategies.

• Across regions, UK, Canadian and Australian equity strategies have the lowest average turnover value, while European (including UK), international and US strategies have the highest average turnover levels.

The key insights from the qualitative case study analysis from the fund managers include:

• Causes of short-termism include volatile markets and changing macroeconomic conditions; mixed signals from clients; short-term incentive systems; and behavioural biases;

• Fund managers recognize the potential destructive nature of short-termism even while claiming it was unavoidable. The managers indicated that short-termism potentially places short-term pressure on companies; increases market volatility;
demonstrates a lack of discipline in fund managers’ investment processes; and creates a misalignment of interests between fund managers and their clients.

• The managers also identified potential solutions to short-termism, further details of which can be found in the report.

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