“It is disconcerting to see investors virtually abandon long-term goals by focussing on short-term volatility – an attitude which acts as a feedback loop into further volatility. 

“Equity markets are cyclical and the most likely outcome is that market will improve over time; however many investors’ current asset allocation does not match this longer term outlook as they are focussed on short term loss of their capital. 

“The issue of short-termism is not confined to Australia and is a global issue, as evidenced by last week’s release of the Kay Review of UK Equity Markets and Long Term Decision Making [1]. 

“The Review concluded that ‘short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain. 

“Although the report focussed on the UK, I believe that many of the findings are very relevant to the Australian market.

“We have always been concerned by the level of short-termism in the Australian market, and indeed have built an implemented an investment process around the longer term to differentiate ourselves from our peer group,” he said. 

EQT’s Wholesale Flagship Australian Equities Fund, which has a six year track record, has performed in the top quartile over one, three and five years, according the latest Morningstar tables [2]. These tables also show the fund was ranked third out of eighty funds over the five year period. 

Mr Manuell said that EQT has decided to make two changes to the fees for this flagship fund. The new structure enables current and future investors to select a fee option that reflects their view of potential performance. 

The two key changes to the fee structure are:

1. Reduction of the fund’s standard fee management expense ratio (MER) from 0.82% to 0.72%
2. Introduction an alternative fee structure with a flat MER of 0.40% and a performance fee of 20% for outperformance of the S&P/ASX200 Accumulation Index. 

“If investors believes we will repeat our historical performance, then the reduced flat fee option will be best for them. 

“However if investors take a more conservative view, then the alternative reduced fee plus the performance fee option is likely to be more appealing. 

“Because this fee structure has a sliding scale, if we only outperform our benchmark by a small amount, investors will pay less in overall fees than previously.  However, if we achieve significant outperformance – as we always strive to do –investors will pay more in fees but will obviously be better off through higher returns. 

“We recognise that fees has become an important consideration in the fund manager selection process and we have taken this into account in our new fee structure. 

“However, the primary consideration in selecting a fund manager must always be what return is the fund manager targeting and what risk is being taken to deliver those returns. The next consideration is ensuring the fund manager has a robust and logical investment process backed by a skilled and stable investment team,” Mr Manuell said. 

3 August 2012

[1] http://www.bis.gov.uk/kayreview

[2] Morningstar Peer Group Ranking Report (as at 30 June 2012)

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“Indeed, little has been said about the impact of this trend on investment strategies, or the need for a new strategy if a major shift occurs in the balance of a portfolio. 

“Long-term investors in particular need to be very cautious about moving out of growth assets into cash for a number of reasons. 

“While putting savings into bank deposits and other forms of cash might ensure there is no short-term capital loss, it also ensures there is no possibility of capital gain, which will always act to the detriment of long-term investors,” Mr Manuell said. 

Mr Manuell says that investors must clearly understand that a “no risk” bank deposit approach to capital carries its own risk.

“Being massively overweight in cash guarantees that the purchasing power of existing capital will be eroded by inflation in the medium to long-term. 

“Short-term thinking will nearly always be detrimental to long-term needs, and long-term investors should be aware that the current fixation with avoiding capital risk comes with its own risks,” he said. 

Mr Manuell said he was concerned that investors do not seem to appreciate the full ramifications of what they are doing when sitting on the sidelines waiting for a more positive view on markets. 

“What these investors are saying is that they are able to time the market, yet all previous experience shows this to be a general fallacy. 

“Few investors are able to pick market highs or lows, and anyone who thinks they can sit on their cash for now, and then buy into the market in good time for the next rising market, are likely to find it is an approach that will cost them dearly.” 

Mt Manuell said that for long-term investors who need to think in time frames of years and decades, appropriate diversification remains the cornerstone to a sound investment strategy. 

“They need to ensure that they have some protection against the impact of inflation, as well as being positioned to take advantage of growth and to avoid becoming a victim of inflation-based capital erosion,” he said.

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