The importance on focusing on short term results is in his view a disease.
There is a strong argument that 2008 was a unique point in investment history where everything was so beaten up that to make money was very easy. Now as we return to a ‘new norm’ making money is much harder.
If we step away from the crowd, money can be made but like everything it is about identifying the right stock. Investing in Woolworths because it was cheap doesn’t necessarily bring success. As we have seen with the likes of Tesco’s there is much more to a stock than meets the eye and the reality is that for most people it is much easier to allow an expert to choose the investments.
This in itself brings challenges. How does an investor choose the right fund? Investment houses tend to promote their star funds, or last year’s success and for investors it is very easy to invest based on last year’s performance.
The danger of a star manager is all too apparent when that manager leaves because the fund is their fund and without them what happens?
At shiniglights.co.uk we catch up with some of the leading managers in the industry to understand how they approach investing.
In this interview we talk to Nick Kirrage of Schroders. He co-manages their Recovery, Global Recovery and Income Funds.
To read our review of the Recovery and Global Recovery Funds click on the links below.
Schroder Recovery Fund – Click Here
Schroder Global Recovery Fund – Click Here
Shininglights.co.uk: “Going back to your teenage years, did you always want to be a fund manager? If you did what route did you take and when did you first assume your first management role? If you didn’t, why did you end up in fund management and again what route did you take and when did you first assume your first management role?”
Nick joined Schroders in 2001. This is his only fund management role, and in his words he is ‘Schroders man and boy!’
When I asked what he wanted to be it turned out his dream was to be a pilot. Only when he went to University did he make the decision that being a pilot was not the career path for him.
He puts his journey to working as a fund manager down to genetics. There was a connection to finance through his family, he found the finance section of the Sunday papers interesting (as well as the sport) and when he was at university he invested part of his grant in his own share portfolio. Of course part of the grant also went into socialising!
Nick explained it was less of a case of falling into fund management but more that it became apparent that it was a place where he wanted to be. It combined his love of data and analysis with a sociable/human element. Putting these two things together was particularly interesting to him, and something he felt he wouldn’t get from being a pilot!
Shininglights.co.uk: “With over 10 years’ experience in the industry, what motivates you daily, yearly and for the long term?”
The answer goes back to being in a place he wants to be. He doesn’t get Sunday evening blues, he enjoys coming to work and is passionate about what he does. To quote Nick “he gets paid to do a job that he loves!”
What motivates him is the people at the end of the chain, these are the people who are using the fund to invest their ISA or Pension. Over time he has met many investors and he feels responsible for delivering on their expectations. He also personally invests in the fund which gives him a connection with other investors.
Obviously he can’t meet all investors and he is aware that people have the ability to check valuations daily; his style of management is different and along with his colleagues they have set up a website called the value perspective which enables them to engage with their investors on what they are doing.
These are some of the aspects of his job which motivate him daily and for the long term.
Shiningligts.co.uk: “With over ten years fund management experience you will have experienced the dotcom bubble, 9.11, global financial meltdown and near collapse of Europe (although this is not necessarily over). Going back over your career can you think of any major mistakes you made, what you have learnt and how has this been used to mould what you do today (and going forward)?”
Nick is very honest and open, and often says things many managers prefer not to say! That for me gives a feeling of trust.
He explained that over time he has made dozens and dozens of mistakes, he is after all human and we all make mistakes. He explained that you have to be realistic, if he can get two thirds of the ideas right and over time thousands of ideas right then this will deliver the returns for investors.
But the past has given him some basic rules of thumb. For example, don’t buy businesses you won’t own in twelve months’ time, don’t buy a business where you wouldn’t buy more if the share price dropped by 50% etc.
The point is that you can’t get it right all the time, however the aim is to get more right than wrong and learn from your mistakes (where you can).
Shininglights.co.uk: “How would you describe your style of management? The industry talks about value managers, growth mangers, contrarians etc. For the average investor what does this mean? And how does your style make you stand out as different in the market?”
Nick’s style of management is different.
It is about going into unloved areas, and often going against the crowd. Investing for him is in part about experience but also looking at history. He explained that the consistent factor that controls the path of a share is human emotion. Shares can get cheap and that is often where the opportunities lie.
The greatest disappointment comes from buying the best performers. Nick took the example of tobacco, 15 years ago it was unloved and cheap. Today it is loved and expensive. Can it deliver the same returns over the next 15 years, it is unlikely!
In contrast banks and supermarkets fifteen years ago were expensive and are now hated and cheap, fundamentally for Nick it is these businesses that offer the opportunities for the future.
Shininlights.co.uk: “Many commentators say that the global financial crisis was a unique event, and a game changer going forward. Particularly as we don’t know the consequences of QE, how long we will remain in a low interest environment etc. If this is the case then everything we have learnt about investing goes out of the window because we just don’t know what will happen? There is also an argument that any manager could make money in the last five years, however going forward only the good managers will shine. What is your view, and do you feel you need to adapt your style to reflect this new environment?
Nick explained that there is always the argument that this time is different; the tech bubble was different, QE is different etc. The reality is that it is always a bit different, and there are always different outcomes.
His style of investing is about fishing in areas where things are already bad and therefore although things might be slightly different the style doesn’t need to change because there will be a ‘new different’ in the future!
Shininglights.co.uk: “For personal investors we have seen the collapse in share price of banks and now supermarkets, does this highlight that without the research it is much harder for them to invest directly in shares?”
Fundamentally Nick believes that to be a good investor you need to put the work into it.
He used the analogy of wine tasting; if you spend a lot of time analysing wine then you can be a good wine taster. Whether you can be the best, is another question.
It is about understanding what you are buying and accepting that we all make mistakes. A key tip for any investor is diversification. Although Nick believes there are opportunities in Banks and Supermarkets he doesn’t put 100% of the fund in these areas, the portfolio is diversified and blends different ideas on the basis that on average he will be right.
The danger for any investor, and in particular individual investors is not to accept that we make mistakes and not diversifying.
Shininglights.co.uk: “There remains an argument that active fund managers particularly in the US rarely over the long term outperform the index. For personal investors looking at funds what do you feel they need to look at both from choosing active over passive, and more importantly looking at the investment style of an active manager?”
Nick explained that this is a very difficult decision.
Much of it is down to whether we think this person is a good person. The problem (or challenge) is that some managers are very good at selling themselves, and sometimes they disappoint.
Performance is therefore an unknown but one thing that is certain is fees. Active funds are expensive compared to Passive funds and therefore it is logical to invest where the only certainty is price – cheap with uncertain returns is better than expensive with uncertain returns!
Nick believes there are certain rules of the thumb investors can follow when looking at active managers which should help in deciding where to invest:
- Look for managers who have managed strategies for a significant period of time – ten years is a good benchmark
- Look at whether there is an edge to what the manager is doing
- Look at whether the process is repeatable
- Look at the long term performance figures (5 to 10 years)
He added that he has managed his fund for over nine years and it is getting close to the ten year mark. Over that time the strategy has been consistent over different cycles and he has delivered strong above benchmark returns. (Of course, past performance is no guide to the future and investments can fall as well as rise!)
Effectively avoid the noise and do the research if you are going down the active route.
Shininglights.co.uk: “Connected with the question above. Some funds have become victims of their own success where the size of assets impact future returns. Do you believe size can be a problem or that a good manager can deliver consistent outperformance over the longer term irrespective of the size of their fund?”
Nick explained that this depends on what the fund is trying to do.
A fund investing in the FTSE 100 can be a big fund because of the nature of the assets it is holding.
However something like the Recovery Fund that he co-manages needs to control the level of assets. The reason being is that by their nature if companies are unloved, the share price falls and then they get smaller. The fund needs to have the ability to buy shares in the company but does not want to be in a position where it is buying the company.
The Recovery Fund is relatively small at circa £700 million and Nick believes this is a good size with flexibility above that. It is something they constantly review and evidence shows that great funds which attract large sums of assets tend to do badly because the size hampers what they were once good at.
Shininglights.co.uk: “Shortermism remains a problem, investors want returns quickly and in reality they sell when the market is falling and buy when the market is rising. How long should investors look to hold investments and what would be your best tip to investing.”
Nick believes shortermism is a problem.
We discussed Tesco’s as an example. In August 2014 the share price was 240p, it is now 220p. During this period it has fallen as low as 170p, and gone as high as 250p. Going further out the price swing over 18 months has gone from 350p to 170p.
For investors this can lead to disappointment and fear. It is natural to ask have I done the right thing, and this is much harder when the price is falling.
Digging deeper the market value of Tesco’s over a decade has doubled and halved, the question is ‘is this the true value’ or is ‘it human behaviour driving it?’
In Nick’s view it is the later and this is the problem with shortermism. When investing Nick looks at a number of factors including what has happened in the past.
Over 20 years the price of Tescos has gone from 43p to 480p and back down to 170p, and currently 220p. The question for Nick is whether over a five year time horizon it can get better and then how much better. There is no perfect time to buy and short weaknesses in the share price can deliver long term opportunities.
Shininglights.co.uk: “Finally, with a crystal ball to the future (which of course we don’t have), what do you feel are the challenges facing investors, and in reality do you think these have changed or will change?”
Unsurprisingly the biggest challenge in Nick’s view is shortermism. The importance on focusing on short term results is in his view a disease.
In past people looked at the 3 and 5 year numbers; now managers live and die by their 1 year figures. By luck a fund manager can deliver good numbers over 12 months but it is skill that delivers the consistently strong numbers.
He also added that if we invest for 5 to 10 years then volatility is almost irrelevant because it is smoothed over the longer period of time. If we check daily then the volatility is accentuated, which can lead to irrational decisions.
Nick ended with this thought, 10 years ago most managers had low turnover on their funds and holding periods of 5 years. Today his fund has low turnover and an average holding period of 5 years, however where this was the norm ten years ago it is no longer the case. This reflects what is changing and his view is the greatest challenge for investors.