Those of you who follow our monthly reports closely might have noticed a subtle change of tone in the July and August versions. That change is going to be a lot more obvious in the September Quarterly Report, set to be released in the first few weeks of October.
One of the speakers at an investing conference we attended in July was Joel Cohen, a representative of the MIT Endowment Fund. While most of us were there to talk about stocks, Joel talked about his experience watching funds management businesses from the outside. With more than US$10bn to look after and a stated philosophy of selecting active managers to invest on the fund’s behalf, Cohen has seen a lot of funds management businesses.
His speech highlighted the mistakes he has seen bring funds management businesses unstuck. One common shortcoming is a disconnect between the philosophy underlying the investment process and the communication between the fund manager and his or her investors.
Why, he asked, does a fund manager who professes to invest for the long term feel the need to explain every little rise or fall in the unit price? Why are the quarterly reports focused on which stock rose 5% and which fell 10% when the investments are supposed to be held for three to five years? And what impact does all of this short-term, performance focused reporting have on the manager’s actual investing?
When I look at the format of our historical monthly and quarterly reports, we’re guilty. Yes, we write plenty about long term investing and the underlying thesis behind the investments we make on your behalf. But the first paragraph of every report we’ve ever written has focused on the performance over the previous one month or one quarter.
It is of no use to you. Apart from encouraging you to think about the wrong things, you can get the performance off the website any time you feel like it. And it potentially impacts our investing without us even knowing it.
So, as of this quarter, we’re going to remove all commentary about short-term performance from the monthly and quarterly reports. The reports will be about our investments, why they have been made and how they are progressing. Then, shortly following 30 June every year, we’ll send you a detailed performance report that shows you what we have achieved over the long term and how we have done it. This performance reporting will be much more detailed than anything we’ve provided before, but it will only be once per year and will be focused on the long term results.
While recognising that this is going to be quite different from the industry standard, the more I think about it, the more I think it is the right approach for our business and Forager’s investors. I’d love to hear your thoughts, though, so please leave any comments at the bottom of this post.
If you look in the dictionary for “contrarian” you’ll find a picture of Steve as I don’t know of any other fund that does this, so I’m hoping my fellow investors understand this positive change and it is here to stay but yeah this is very cool to hear as I always skipped past the paragraphs relating to the short term gobbledygook anyway and went straight to the meat of the report.
Sounds good!
Great idea Steve. Monthly performance reporting has always reminded me of the hours of lost time spent by investment bankers doing presentations for internal schmoozing to their bosses, rather than actually working. The more time you can spend investing and the less explaining that XYZ’s share price fell last month the better.
Self-awareness is a beautiful thing!
Looking forward to seeing the new periodic reports.
Fine with me, Steve. I’d much prefer to hear about what the company is actually doing and how the investment case is stacking up rather than what the market thinks. I appreciate all your updates.
Sounds like a great idea.
I mainly read the monthly statements for comments on the companies owned by the fund. Some of these I own directly and others I may want to own directly in the future.
Regards
Es
Nice work Steve! Long term is how everyone should be using this fund! If you want short term updates get into an etf. I look forward to the new approach and the invaluable insights to come as a result!
Giddy up!
Absolutely no problem with this. Makes perfect sense.
Steve, sounds plausible however it is clear to see how this might be used as a smoke screen by the unscrupulous to hide a mess for an extended period of time. The problem is so often the person in charge becomes like a guru and it comes to be about faith rather than hard numbers. At the end of the day fund manager has to perform or he/she is worthless.
I like it! More forward-looking commentary would be great as it focuses on things you can control and change rather than explaining away things that have already happened. I would enjoy seeing the investment thesis for any new investments; maybe some what-if analysis about how the fund is positioned under different macro scenarios if you feel it is important.
Good thinking 99! Keep focused on the horizon/destination without explaining every bump and bend in the road.
For over a decade through the tech boom/bust I worked for a NASDAQ software company that would create a new 2-year strategy every time the quarterly results missed the mark (mostly as a result of raucous short-term investors getting into the ear of successive CEOs). Sometimes we’d have 5 strategies in 2 years!
The best thing for any long-term entity is to adopt a sensible strategy and then patiently and perceptively persist.
I’m like others above – the short-term scenery is of limited interest so long as the destination remains valid and desirable.
Long term is why I got in to start with and why I have stayed so this works for me. Looking forward (long time again) to your new improved performance report!
OK , let’s watch for a little before coming to conclusions
It makes sense. I think it’s a much more sensible approach to reporting on results.
An excellent idea.
I get the Weekend AFR.
Every year there is a self-congratulatory spread about “Fund Manager of the year”.
EVERY YEAR THEY ARE DIFFERENT!
So if these guys really had some kind of secret sauce, firstly, why tell anyone (its meant to be a secret!). But secondly, they would be there year after year – and they are not.
This kind of reward for short term results drives all manner of poor decisions.
So please by all means focus on the long term, and stop analysing (and making apologies for) the short term.
And please please please do not go near or enter the Fund Manager Of The Year competitions!
It sounds like the new style of reports will be the correct focus.
I also recommend – what you do naturally is determine your objective , review what is working and what is not and change accordingly.
Thanks for the communication appreciate it.
Voting machine
Weighing machine
We all understand why that distinction is important.
Well done Steve.
Interesting i had just decided not to update my personal report quarterly anymore, but do it annually.
I agree this is great alignment with your objective. Reporting the short term results from a psychological viewpoint can’t be good. It sure to play on people’s mind.
I’d much rather you guys measuring the things that count. Such as how the business is prigressing in regards to your investment case.
The reason I invest in your funds is because you back your assessment of an opportunity rather than follow the herd.
Sounds good. Keep me focused on the right thing.
I will direct my impatience to hitting the refresh button all day on my etrade portfolio screen.
When I read the reports, the parts I read are the individual company reports, and why you have invested in them, and why you have sold them. Some I like and agree with (B.C. Speakers), and others I question the rational behind the investment (Harley Davidson), but overall that is what interests me. I also like to read the economic commentary, which helps to place some of the investments in context. The short-term performance, I ignore anyway, after all I understand these are five year investments. I didn’t think about the effects these would have on you guys; you may have a point here, so from my point of view, the change is likely to be a good one.
I like the idea.
But I have just one comment/query.
Most of my friends and family would not like it.
But also, most of my friends and family are not long term, value investors.
So, does it hurt the fund to not please them?
Or is the fund better off without them and their potentially damaging in and out flows?
Too right, I agree with Peter C, it’s the companies the interest me. I enjoy the quarterly, don’t really look at movement. I figure you guys are a lot smarter than me, and are paid to find under valued opportunities. Also, unlike some, I prefer not invest directly in the same companies the fund’s do unless I find out after the fact. What worries me the most are the fact that some of these comments are made after 0400 in the morning !
Excellent idea.
I have often been puzzled as to why value investing services report on short term performance . Articles by Intelligent Investor are frequently guilty of this also.
Great idea and commendable that Forager are open to constructive change.
While you are at it may I make one more suggestion? Most value investors pride themselves on “bottom-up” stock selection and claim to ignore the macroeconomic noise. However, for some reason many of these investors devote considerable space in their quarterly letters to discuss macro events.
I would love to see less talk about China, commodity markets, QE etc in Forager’s letters and more time devoted to the investments.
Dear Steve, reflective thinking processes is a good spend and equally a stand alone premium investment of Forager management fees…
in this blog, there are a grand total of 36 pronouns – subjective, objective, possessive, reflective and possessive adjectives
a disciplined and knowing exercise would be to rewrite the blog with zero pronouns – this mindset will anchor the renewed perspective Forager is developing over time… more so, it will be an ongoing self auditing process with demonstrated presence to the task at hand…
the reporting is sprinkled generously with investment defensiveness, particularly evident during the start up of Intelligent Investor Value Fund in October 2009 reporting in it’s early development stages
i am not scared of short term or the long term girations and i,m intensly interested in any and all your comments… personally i like to continue to hear what you have to say about the ups and down of things..i dont need to be protected especially on the back of comments made my fund of funds….but it sounds like you have made your mind up already …. fund of funds managers!!! Crikey…..
Jane
Excellent. Presumably all the investors are in for the long haul, so this is aligned with that. Well done, good thinking and keep up the good work.
Steve, you are on the money on this one. You are ahead of the curve compared to your peers on this, and your business will be better for it. The difference between you and and many others in this funds management business is you know your limitations, you are humble, while at the same time you are naturally intelligent (… a CFA isn’t a walk in the park). You follow a methodology that isn’t a fad – genuine (…and I emphasize genuine here!) value investing. How many times have I looked at a portfolio of an active ‘growth’ manager’s top 10 stocks and it looks bizarrely similar to an active ‘value’ manager’s top 10 stocks. Your’s don’t look any of theirs …so well done for not index tracking (in good times and bad), and charging me for the pleasure of it 🙂
Are you planning to not have commentary on short term results or not have short term results full stop?
If it is the latter I think it a bad idea. I do not share the almost universal faith here that because a fund has good long term performance it will continue to do so. I have seen too many ‘good’ funds turn bad, in which case I want to be alerted to that possibility as soon as possible ie. by short term performance results. I can then decide for myself if those results are significant. A classic example was a fund that had great 3 and 5 year results, but lousy 3 and 6 month results, the latter resulting from an overly inflexible investment strategy. Eventually the long term results also faltered, by which time the damage had been done.
Hi Graeme. Your concerns are valid. The intention is to nix the short term commentary only, we’ll still report the short and long term numbers each month. And of course those numbers are always available on our website. The intention isn’t to hide from short term under- or out-performance but to ensure our investors and our analysts aren’t overly focused on it to the detriment of what really matters. Thanks for your feedback. Give it a few months and if you love or hate the change, make sure to let us know.
Hi Steve,
Excellent outcome indeed for investors. It will also mean fund managers will focus on investments instead of short term wiggles of prices. It also means more pressure (rightly) to explain their investment thesis instead of mathematical calculations in their letters.
Cheers
Ganesh
Well done Steve.
Right on.