Magazine Issues » March 2019

Opinion: Actual activity

Fiona_RintoulThis winter, I’ve been living part of the time on the Outer Hebrides. While I’ve been there, we’ve been having the garden refenced. Roddy, a fencer and gardener, turns up each morning and commences fencing. At lunchtime, he comes in for a bowl of soup. Otherwise, he doesn’t stop fencing until the light goes.

Such is the pattern of Roddy’s working days. He doesn’t tweet about fencing. He doesn’t go to fencing conferences. He fences.

There is a purity to this that has been lost to most of us. I am a writer, but how much of my time do I spend actually writing? Recently, I conducted a time-monitoring exercise. The results were frightening. Great swathes of my time are gobbled up by deleting emails, managing social media and drinking tea.

You are investment managers. How much of your time do you spend actually investing? This is question that arose when I spoke to Stuart Dunbar of Baillie Gifford for this month’s feature on equity volatility (page 24). Let us leave aside time spent on emails, social media and hot beverages. Let us consider instead what investment managers do with the time that they spend on investment. Are they concentrating on the activities that matter? In a paper entitled “Let’s talk about actual investing”, Dunbar suggests that often they are not.

This is not an argument about active versus passive investment. Cheap market access has its place, he writes, but “it isn’t really investing in a pure sense”; it isn’t actual investing.

So, what is actual investing? “The fundamental purpose of investing is to use available capital from those who have surplus to fund the ideas and projects of entrepreneurs and company managers who see an opportunity to generate profits,” writes Dunbar. “Our job as professional investors is to weigh up the risks associated with those ideas and projects, the range of possible outcomes and their probabilities, and thereby put a price on the equity or debt that is being used as funding.”

Somewhere around the 1960s, the investment industry lost sight of this fundamental purpose, he suggests. The capital asset pricing model introduced a world where complexity has become confused with value. While in the 19th century the investment industry was concerned with actual companies and actual projects, it is now obsessed with abstract concepts such as regional allocations, sector positions and factor weights.

I do remember a moment after the global financial crisis when that complexity was questioned. But that is long gone, and Dunbar is surely right when he says that the focus for much of the investment management industry is on trying to anticipate the behaviour of other investors. This brings us back to the topic of volatility on the equity market. A good opportunity to buy undervalued companies? Not for Dunbar. It’s not just that short-term volatility shouldn’t really matter to a long-term investor; it’s more that the market itself shouldn’t matter.

“We need a secondary market in securities to provide occasional liquidity between investors but, beyond that role, we should essentially ignore it,” he writes. Wow.

My fence is done now, thanks to Roddy. Fencers should actually fence. Writers should actually write. Investors should actually invest. Not to do so invites calumny. “Managers’ collective failure to focus on actual investment lets clients down and contributes to the malaise in which the industry finds itself,” Dunbar writes. “It might even have something to do with the low levels of productivity growth in many economies.”

Fiona Rintoul is editor-at-large at Funds Europe

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