Shareholders to Blame for Financial Crisis

Investors are taking too short-term a market view, leaving companies without ownership or guidance, says Scottish Mortgage manager James Anderson

Emma Wall 15 May, 2014 | 9:15AM
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Fund managers are almost as much to blame for the banking crisis as bankers – so accuses Baillie Gifford partner and manager of Scottish Mortgage investment trust (SMT) James Anderson.

You can become consumed by greed in London

“We have a profound problem in the fund management industry,” he said. “Increasingly shorter-term investment horizons have left companies without owners. If we just trade share certificates instead of helping out boards and being active shareholders we risk another crisis – and fundamentally lower investment returns.”

The focus on bonuses and ever growing charges has meant the business of managing money, along with investors’ expectations, have become very short-termist since the credit crisis. This shift in focus is damaging to both shareholders’ portfolios and the companies they invest in. Short-termism also creates market inefficiencies and volatility, which in turn damage investors’ confidence.

Speaking at the Morningstar Investment Conference in London this week, Anderson professed it strange that fund managers had escaped without blame over the past decade for not scrutinising more carefully the companies in their portfolios, and said that as collective shareholders the industry had a responsibility that the scandals at the likes of Goldmans and Barclays never happened again.

Anderson, who is based in Scotland, went on to say one of the most dangerous place to run money was the City.

“London has too many distractions – you can become consumed by greed, swept up with the oligarchs and the investment bankers,” he said. “All professional investors need at least one very old client. They have seen it all before and are not distracted by market or media noise. Having clients that encourage you reflect on your past mistakes is important for securing future returns.”

Financial advisers attending Anderson’s presentation professed that it had become increasingly difficult to encourage clients to ignore market noise and focus on an investment horizon of three years or more.

Anderson has been running Scottish Mortgage since 2000 and thanks to consistent outperformance has been awarded a Gold Analyst Rating by Morningstar. Closed-end fund analyst Szymon Idzikowski said that to the end of January, Scottish Mortgage was comfortably ahead of its peers in three, five and 10 years.

“It has not always been a smooth ride however,” he added. “In 2008 it lost more than 42%, dragged down more than the markets by the structural gearing in place. Indeed, there are a number of fixed-term debentures here, so the fund tends to have gearing of at least 10%. That said, since 2008, the board has become more involved in gearing decisions and they bring additional expertise and guidance to the table.”


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Emma Wall  is former Senior International Editor for Morningstar