*** FT Article ***
INVESTMENT: Benchmarking curse
3/28/99
Warren Buffett, Omaha's (possibly the world's) greatest investor, confesses his ignorance of technology - which appears to extend to current techniques of investment. His annual statement in the Berkshire Hathaway report does not mention the paraphernalia of load differences, active risk and benchmarks that burden more conventional professional investors. He acknowledges, though, that his main job (and that of his partner, Charlie Munger) is allocating capital. He admits they underperformed the S&P 500 Index last year on an underlying basis - without spelling out by how much.
Buffett is, of course, a long-term investor. He proposes to continue indefinitely even after his ashes are confined within an urn placed in his office. The typical money manager, however, cannot hope for immortality or even longevity.
Benchmarking is a curse of the age. The UK faces imminent upheavals here; a new sector classification system takes effect next week with the objective of global harmonisation. Another shift could come in September with the launch of the global multinationals index, which could subsume 40 per cent of the All-Share Index capitalisation.
The UK stock market is curiously skewed. Four sectors - banks, telecommunications services, pharmaceuticals and oil and gas - account for 46 per cent of the All-Share and 56 per cent of the FTSE 100 (though, strangely, only 4 per cent of the FTSE 250).
However, fashionable information technology represents less than 2 per cent of the All-Share. As for more traditional sectors, four great global industries - chemicals, steel, mining and automobiles - account for just 3.2 per cent in aggregate.
Much analysis of stocks and sectors is focused not on the value (or lack of it) they offer but on who "underowns" or "overowns" them relative to market weightings. Index-tracking funds are deliberately indiscriminate buyers and can easily be manoeuvred into being aggressive bidders for stocks with an inadequate free float.
Benchmarked active managers are almost as vulnerable. The neutral position for a manager who does not have a view on a stock is not to ignore it but to own a full weighting. Warren Buffett does not invest like this, nor does George Soros for that matter. But in the benchmarked world, risk is shifted from managers to clients.
Without a value peg, share prices can become extremely volatile, as in the second half of 1998. It is risky to own shares; from a manager's point of view, however, it is risky not to.
Active managers often still take aggressive positions, though. According to Dresdner Kleinwort Benson, UK pension funds are heavily overweight in Allied Domecq, United Biscuits and British Land but underweight in Halifax. They have zero exposure to Eurotunnel. US institutions active in the UK market are very exposed to consumer cyclicals and to chemicals and steel.
Are these positions risky? Hardly more so, perhaps, than "neutral" exposures. Dramatic shifts can take place when technical shortages are unexpectedly satisfied, as with the massive sales of big stakes in UK telecom stocks in recent weeks. The telecoms sector index has just tumbled by 11 per cent because of sudden indigestible supply.
The inherent volatility in such a concentrated market is emphasised. Perhaps, too, the sluggishness of the UK market (up only 6 per cent this quarter despite huge available cash resources) is explained by the high prices of the desirable stocks.
Meanwhile Warren Buffett refuses to disclose most of his holdings of equities, to frustrate "piggybackers". Like the comparably incorrect Wim Duisenberg of the European Central Bank, he believes secrecy adds value.
Other professional money managers, though, will notice the opportunity cost of Berkshire Hathaway's $15bn of "cash equivalents". They would be sacked for the same offence in a bull market. But then, they cannot boast the same track record. |
