Woodford: We must stop 'corrosive' stock churning

Invesco Perpetual star Neil Woodford is among a group of high profile investors to hit out at today’s short-term performance culture, saying this “obsession” is damaging long-term returns.

Woodford, the UK’s most highly regarded manager, has labelled the increasing short term focus of the stock market as the single most “corrosive characteristic” of the investment industry.

Holding periods for UK equities have fallen sharply over the years, with the Bank of England calculating the average duration has fallen from around five years in the mid-1960s to about 7.5 months in 2007.

It is a similar story across the Atlantic, with the average holding period for US stocks dropping from more than two years in 1990 to under nine months last year.

Woodford, who manages upwards of £23bn across his UK equity portfolios at Invesco Perpetual, said his average stock holding period was now over six years.

“The increasing short-term focus of the stock market, which is undeniable, is a corrosive characteristic of the market,” he said.

“It is hard for the whole industry to argue clearly that it is focused on the needs of its underlying investors, if it continues to churn money in the way that it does.

“We need to ask ourselves some hard questions. Are we doing things that are socially useful? Have we added value to our ultimate investors?”

Woodford believes this short-termism is one of the reasons why many managers fail to outperform the index.

“There are a lot of busy fools creating huge friction, where the costs are borne by investors,” the manager said.

“The trouble is you do not know who those active managers are who will underperform the index at any one time. The industry has not done a good job over the long-term for its investors.

“It is why the active fund industry is periodically under attack from industry commentators on charging structures

“The evidence is not compelling on that front by the way; many of the index funds have failed to match the index.”

Woodford is calling on fund groups to shift the focus back to generating long-term returns.

“I believe the industry has to look at itself, particularly active fund management,” he added. “I do not think our obsession with short-term performance is terribly conducive to delivering what we are in business to deliver – which is good long-term returns to our investors.”

Tullett Prebon CEO Terry Smith recently launched a high-conviction equity fund to try and offer investors an alternative to today’s “destructive” fund management industry.

Smith, the founder of new manager Fundsmith, said the portfolio turnover of his fund is likely to be just 5% per annum.

“There are many great quotes in investment, and Warren Buffett says it the best: ‘The stock market is a mechanism from transferring wealth from the active to the patient’,” Smith said.

“The idea more frequency of data leads to better decisions is flawed. The advent of the internet has fed people more data, but data  and information are not the same thing

“All the evidence is there. If you try and make decisions for the short term, you will get it wrong.”

LV= UK Growth manager Michael Crawford added: “The Bank of England calculates the average holding period of a UK equity fell to less than eight months in 2007.

“Although this includes the high level of trading from the rapidly growing hedge fund industry, it implies that a UK pension fund typically buys and sells the same shares 25 times over the life of the average liability. The London School of Economics estimates such a strategy could reduce the end value of a pension by up to 30%.”

Smith also hit out at the increasing usage of high frequency trading.

“High frequency trading has no social utility whatsoever. The average holding period for a high-frequency trader is 11 seconds. What is the point of that? Most of these systems work at 50 to 100 milliseconds. The human eye can only work at 250 milliseconds,” he added.

“The idea this provides liquidity is lunacy. During the ‘Flash Crash’ on 6 May, because of HFT algorithms, Apple shares traded at one cent a share and $100,000 a share. There was no liquidity.”