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Fund managers across the planet speak an identical language while addressing investors who look to allocate money across equities. it's common parlance to talk about equity investing with a 5-year horizon in mind. However, watching data across investments in funds over the last 40 years shows that a mean investor holding in mutual funds is currently at 2.2 years.
The same number was at a mean of three .3 years, 10 years back. Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch's tenure. His average annual return during this era was 29 percent. this is often an interesting return over the 13-year period. He was easily one among the best-performing fund managers for his asset class. It should be noted that this wasn't a secret. Fidelity's Magellan fund became one among the most important mutual funds thanks to its success under Peter Lynch. Given all that, you'd expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. the typical investor within the fund actually lost money – again has got to do with how long the investors held the fund, and once they entered the fund.
A look at an alternate asset class in investors' portfolios, land , and land combined paints a really different picture. the typical holding period for the asset class for investors within the residential asset class has been 9.5 years in India and eight .6 years globally. this is often in sharp contrast to the holding period of equities. the 2 reasons one can attribute to the present relate to the high transaction costs and therefore the relatively low liquidity of the asset class as compared to equities.
Every fund manager wants their investors to remain with their fund and increase their duration that they will manage their client's money. However, it's important for the fund manager to understand that the chances of doing an equivalent are against them. There are some learnings from the important estate holdings of investors that one can apply to equities to extend an equivalent odds, and successively , ensuring investors stay invested for a extended cycle within the fund.
One of the important aspects of equity investors that land investors wouldn't need to see is news-based volatility that immediately translates into price moves. These for the foremost part are unnerving for investors which tends to form them pull out money during times of volatility – though they often tend to be periods of opportunity (with the advantage of hindsight).
It is important that fund managers consider it imperative to teach their investors and clients on the investments they hold alongside the rationale. The human mind derives comfort out of the known and panics out of the unknown. While land prices may fall too, we derive comfort with the situation at which we own the asset. However, in many cases, an equivalent comfort doesn't come from the fund, as that has predominantly been the world of the unknown for investors.
The second aspect that fund managers would be better doing is to manage the downside risk for investors. While the pressure to be the simplest performing fund annually exists for all funds, it's imperative for the fund to be the foremost consistent (rather than the simplest performing) - consistency is measured from how often the fund is among the highest 10% of the funds annually . This puts a much bigger onus on risk management instead of watching absolute performance annually .
While it's easy for responsible investors and says that they are doing not check out the asset class from a long-term perspective, it's imperative that the industry looks inward and takes steps as an attempt to consciously increase the holding period of investors – this may provide an outsized win-win situation for the industry and tremendous tailwinds to equity investing as an asset class in our country.
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