As the bull run ends, fund managers will have a job on their hands
An increase in market volatility has many implications
Now comes the difficult bit. When the bull run was in full pelt it was relatively easy to make money in the markets, and much easier to brush aside problems.
Even Hong Kong’s hapless Mandatory Provident Fund managers did not look too bad and boasted of an average net return of more than 22 per cent last year. Only the churlish would point out that this figure is substantially below the 36 per cent rise in the local stock market in the same period, but at least the MPF’s suckers could claim a healthy double-digit boost.
Most forms of success manage to lift the spirits or, as the actress Elizabeth Taylor succinctly put it, “there’s no perfume like success”.
In the world of markets, a general upward movement tows along both the good and the bad. As long as the markets are buoyant there is little point in trying to be clever with stock picking, which in turn explains why exchange-traded funds, or ETFs, saw such a stellar inflow of funds. Following a record monthly inflow last month, total ETF funds soared to a new high of US$5 trillion.
Recent events suggest that the bull run party is breaking up or may indeed be over. The first signs of a major reversal have given way to an extreme bout of volatility and this has many implications.
First up, it is almost certain, at least in the short term, that the ultimate passive investment strategy, exemplified by reliance on ETFs, is far less likely to secure the best results.
The case for an active strategy has never been stronger and wily fund managers have an opportunity to show their mettle. That is even though history demonstrates that this mettle has often been tarnished in post-bull run situations. This has not prevented the trundling out of all the old clichés about opportunities emerging in times of crisis (we are not yet in a crisis but, hey-ho, there are some people who cannot bear seeing a good cliché go to waste).
What is going to happen now is that the really smart fund managers stand to make a killing because volatility has a habit of making a small number of people seriously rich, leaving most others to lick their wounds. This explains why there has been great excitement over the announcement that the star Australian hedge fund manager, Greg Coffey, is planning to get back into the fray after retiring at the top of his game. He is launching a new London-based emerging markets fund and punters are queuing up to get a piece of the action.
He is not alone and will be joined by a host of hedge fund specialists who languished when markets were buoyant and had fewer takers for their high-risk strategies at a time when it was easy to make money in markedly less risky environments. Only a few of them will succeed.
As the unease spreads, smaller investors will probably be caught out as they sell into falling markets and ultimately panic, wilfully ignoring history and the advice of Warren Buffett, the grandad of the invest-and-hold strategy, who basically argues that over time quality investments will always prevail and there is no need to jump around even when markets are tumbling.
But there is more to this moment in time because while the cash was flowing in companies, fund managers found it much easier to escape the sort of criticism that they inevitably face at other times. Wads of money have a way of silencing critics and help to paper over cracks that quickly re-emerge when funds are in short supply.
Thus, even the worst fund managers can put on quite a good performance in a rising market and company boards can brush aside their critics by pointing to rising share prices.
This tendency is reflected in the fact that last year proxy challenges to US boardrooms fell to a five-year low, according to figures from FactSet. In the buoyant mood of a bull run, company directors could avert criticism and had the cash to pay for measures that would keep shareholders happy.
As the markets turn, not only are companies likely to see the re-emergence of challenges to the authority of their boards, but investors are also likely to be more vocal in demanding better performance from their fund managers.
What remains to be seen is whether the Egoist-in-Chief in the White House, who claimed credit for the success of the stock market, will now take responsibility for its fall.
Actually, we know the answer to that one.
Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster