Glen Arnold – Author and fund manager
RP: There has been a proliferation in recent decades in investment journalism. Some of it’s helpful for investors, but much of it isn’t.
Author and fund manager Glen Arnold says there are two main drawbacks with consuming financial media. The first problem is that it encourages investors to focus too much on how their portfolio is performing.
GA: It’s very difficult for people to overcome their psychological biases. We are all excessively short-term focused – so the media, investors themselves, will tend to focus on short-term movements. You want that satisfaction of being able to say to your spouse: “I’ve just outperformed the stock market here. Over the last month I’ve done extraordinarily well. Look at that. Wonderful.” That gives you a good feeling, and that’s what you’re looking for. You’re looking for that short-term fix all the time, whereas what you really need are people or an investment philosophy that will perform over the longrun. Over the very long-run, and you should be able to stand back and deny that side of yourself that insists on short-term satisfaction.
RP: The second problem that Glen Arnold points out with the financial media is that the funds which tend to attract the most attention usually aren’t the best ones for investors to use. Often, they’re the ones that the fund industry wants to promote.
GA: They are spending tens of millions – possibly hundreds of millions, I don’t know – on marketing. So a lot of that is going to feed through into the media, so you’re going to get a lot more attention towards the active fund managers. Now, if they’re charging one and a half per cent; a lot of that money – say half a per cent of that – is going to go into the marketing effort. So you’re going to hear a lot more about active fund managers than you are about the passive ones. The passive ones are only receiving, say, point three of a per cent. So therefore, they don’t have the marketing budget.
RP: In fact, the evidence shows that funds with strong recent performance are often just the funds you need to avoid. Consistent outperformance is very rare.
GA: You’ve got academics sitting in universities and what they do is: they take, say, 1000 different funds, and they look at their performances over five years, and then rank them. So the top fund is the one that’s performed the best over the last five years, and then you split them into four groups. So you’ve got the top 25 per cent up there and the bottom 25 per cent over here. Then you follow them over the next five years, and you do this year after year after year after year… and they find very, very low correlation. There isn’t much consistency between the fund’s past performance and its future performance.
RP: Again, some journalists, and some publications, are more helpful than others. But beware: the financial media can be more of a hindrance than a help.