During his recent interview with Tobias legendary Australian fund manager Peter Simpson-Morgan, who ran Perpetual, discusses why investors shouldn’t use benchmark comparisons, sharpe ratios, and the like saying:
Tobias Carlisle: So, you no longer have multi-billions of dollars that you have to get into the companies, and you don’t have a board telling you to buy News Corp at the very peak, so what does that do to your investing? How do you invest now?
Peter Simpson-Morgan: The first starting point, again, this is going to sound bad, but the first starting point is…I should say this as well, Toby, and I mean it sincerely, when we started with Perpetual, we had no process, we had a portfolio of stocks…we didn’t know what our performance was until 3 days after the end of the month.
Peter Simpson-Morgan: Our first starting point was not to lose money…it was 3 years at Perpetual before even knew what a benchmark was. And I wish we never done it, but…never been, you know-
Tobias Carlisle: Never found the benchmark?
Peter Simpson-Morgan: Well, never found it. Being a benchmark, unaware. A benchmark unaware today. Once you go into the benchmarks sort of philosophy, and they all want to do it all the researchers and consultants want you to benchmark you against something and it’s like this passive thing that’s playing around the world today.
Peter Simpson-Morgan: And I’m not just saying this because I’m active and I’m a stock picker. I can see it ending in disaster somewhere. I mean, we take the News Corp example, could you imagine if a stock in the U.S. got to 20 per cent of the benchmark over there, or the entrepreneurs became 25 per cent of the global market around the world, and it’s going to happen, and it may well happen again here in Australia.
Peter Simpson-Morgan: I mean, once you start getting benchmarks, you’ve got find things like tracking error, which I, to this day, still don’t know how you calculate. Sharpe ratios, well whatever they are. It’s not true stock picking.
If I take a step further, when we were over at 452, we were getting performance figures basically on a minute by minute basis, and it’s the pressure associated with just watching that performance is just so stupid and so ridiculous. It’s basically what fund managements become.
Peter Simpson-Morgan: So, I’m not…I’m investing money where I should. And as I said, given that this is my money and it should be the same when you’re managing other people’s money, my first port of call is I don’t want to lose it. But the trouble in the funds management industry, your benchmarked to a benchmark, so…it doesn’t mean your first port of call is not to lose money, your first port of call is outperform the benchmark, which means you could lose money if markets go down, but you can be rewarded because you’re down 7 per cent, and others are down 15 per cent. And the client is actually losing money, and not happy. I think it’s just…it’s become so much tied to that investors are no longer…fund managers are no longer investing perhaps they should or want.
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