The battle against the short-termists

Julian Chillingworth, CIO of Rathbone Unit Trust Management, warns against a short-termist attitude in the current climate.

Short-termism is back with a vengeance. In recent weeks, research has thrown up an alarming statistic: the average holding period of a stock for a US mutual fund has plummeted to just nine months (pretty appalling in itself) but may be nearer to just six. Compare this with an average of 10 years, back in the 1940s.

Furthermore, at the time of writing, a swathe of data points is forcing a retreat in risk assets. Let’s take this a step further: in the space of a week, investors have gone from interpreting the increase in the US discount rate as a sign of economic strength to changing course on disappointing consumer confidence numbers.

Predicating decisions

Somewhere along the line it has become perfectly acceptable to predicate what should be long-term investment decisions on volatile data points, quarterly figures and a lack of psychological stamina. Who can blame the way things are turning out? The clock on my Bloomberg screen ticks away every month ahead of the notoriously volatile US non-farm payroll figures, and markets wait to pounce on the outcome. The here-and-now culture is hard to escape.

However, it is very possible to make money in volatile and range-bound markets. Between 1999 and 2009, the market experienced some serious gyrations. Over this time, tracking the FTSE All-Share index gained just 3.25% (capital terms) and 47.11% (total return). However, during that time, certain businesses, such as Diageo and British American Tobacco (BAT) beat the market spectacularly.

Diageo was up by 58% and 133% (capital and total return terms, respectively). BAT, on the other hand, returned 282% and 550%, an exceptional outperformance by most standards. These are businesses with robust balance sheets that offer products and services that people use repeatedly, and enjoy strong barriers to entry. They are what Warren Buffett famously described as “economic moats”. With predictable earnings, they are strong long-term investments, rather than speculations, and their historic records suggest that we can make reasonable assumptions   about the future dividend flows.

Going forward, it will be the ability to grow top-line sales that will be crucial, particularly in the emerging markets. Over the next five to 10 years, we see a ‘South-South’ trade pattern gaining traction, that is trade, almost exclusively, between the southern hemisphere. By extension, consumption patterns will develop, and we see those businesses which can successfully market (indeed ‘localise’) their products – as Diageo and BAT have already done – hauling in the revenues.

Of course, this type of performance is not confined to the behemoths in the FTSE 100 index. Indeed, companies such as Tarsus, Severfield-Rowen, William Hill and Halfords are small- and medium-sized businesses that represent tremendous value, and have similarly strong competitive positions.

A cancer in the industry

The crisis hauled many an investment practice into the docks, but one thing is clear: short-termism is proving a cancer in the industry; a problem that has been exacerbated by fear. Although investors must be cognisant of macro news, there is a danger of throwing out the ‘baby with the bath water’.

In the long term, we believe there will be a premium placed on those companies that proffer strong balance sheets, above-market yields, and can continue to defend their margins. There is no doubt the market is likely to remain choppy this year; however, strong returns are very achievable, without resorting to that speculative ‘dash for trash’.