The asset management industry is fundamentally broken as investors have become too short-termist, according to Janus Henderson fund manager John Bennett. 
While the manager of the £280m Henderson European Focus Trust has a good long-term track record, he said many investors only care about the short-term performance of the trust.
Bennett, who a year ago said he had tilted the trust towards a value bias, said this call was completely wrong, leading to a poor 12 months of performance.
“There is no doubt about it, we tilted our funds two years ago more to value and away from growth. Apart from January this year and six weeks around Donald Trump that has been very wrong and may remain wrong,” he said.
The trust was particularly badly hit over the second half of 2017, during which time it lost 43 basis points while the FTSE World Europe ex UK rose by 2.34 per cent.
As such, over the last six months the fund has lost 3.63 per cent compared to the index’s 1.38 per cent loss and a gain of 1.77 per cent for the IT Europe sector average.
Performance of fund vs sector and benchmark over 6 months
Source: FE Analytics
“We are miles off the benchmark – well, a few per cent – but in this business these days that’s miles,” he said.
The reason for this is that despite there being value opportunities within Europe, there is no momentum driving the stocks higher, the manager noted.
“I can see quite a lot of value at a stock-specific level in Europe but much of it has no momentum and when you have no momentum as a fund manager it doesn’t matter whether it is me or Neil Woodford or Joe Bloggs you tend to get taken out the back of a shed and a bullet put through your head,” Bennett said.
The problem with a bad six months however is that it can impact short-to-medium returns.
Indeed, while the trust is the best performing in the sector over five years, thanks to a disappointing recent period it is underperforming the benchmark over three years and the worst performer over 12 months.
“What I mean by short term is if you have a bad nine months it can make your three-year number look horrible which is completely mad,” he added.
Yet, on an absolute basis the fund has made strong returns: “As even some of my investors have said – stop beating yourself up because you have made us a lot of money over the last three years,” Bennett said.
“Value curmudgeons like myself in absolute terms have done quite well but it is a relative world.”
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
As such, while it would be ideal to invest in companies for the long term, waiting for out-of-favour names to gain momentum, this is not always possible as it will impact relative performance – if not absolute performance.
“I think the biggest challenge we [fund managers] have is we want to commit money to some of the value in vacuum stuff – the value with no momentum – but we are prevented from performance pressures,” the manager said.
“That is just the reality of a fund manager’s lot. Short-term performance is important. A 10-year view – oh my, if only. I actually think three is the number.”
He noted that while private investors tend to be slightly more long-term in their thinking, intermediaries charging a fee to clients tend to “jockey” funds in order to keep performance strong year-on-year.
This yearly approach is why Bennett believes the industry is structurally broken on both the sell side and the buy side.
“That’s a personal view but if I can give you one example of it, just last week I was having a chat with someone on the sell side and this person had a negative view on a stock that we hold the opposite view on,” the manager said.
He said he had met a chief financial officer of the sell-side company who had a completely different outlook over the medium term than the analyst, disputing the view that the company was not growing its top and bottom lines effectively.
“I said ‘I just don’t get it’ and he said ‘What you have got to understand’ – and I think this is really telling – ‘is all of the recommendations must have a one-year time horizon’,” the manager said.
“This is a sell-side house and not a small house that is feeding fund managers ideas. Just think about that.
“I have a five-year view on this company and I am quite sure that your analyst, given that they tend to have a one-year horizon, will change his view on this company at some stage in the next five years.”
However, his one-year view is what the market and clients are typically looking at – rather than a 10, five or even in some cases a three-year view.
“That to me is the antithesis of long-term savings and long-term capital allocation but there is nothing I am allowed a 10-year view on.
“If only I could have a five year and even these days a three-year view it just doesn’t work like that. You can only be as patient as your clients,” Bennett said.
The other example of short-termism, he said, is in markets, where investors have seemingly become less bothered by fundamentals and more on momentum.
“The reason I say it is broken is [that] I think it has been hijacked by a couple of things. One is hedge funds, who trade quarterly numbers; and, two is passives, and I think this leads to misallocations of capital,” the manager noted.
Bennett has run the Henderson European Focus Trust since 2010, during which time it has returned 173.58 per cent, as the below chart shows.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
Currently, the trust remains tilted towards value stocks with financials as its largest sector weighting and exposure to oil & gas companies as well as miners, though it does have some consumer goods stocks and more growth names for risk-balance purposes.
The investment trust has a yield of 2.3 per cent and ongoing charges of 0.87 per cent, according to the latest data from the Association of Investment Companies (AIC).