Timing Will Always be Important
By Victor
Bivell
Eco Investor
May 2009
The bad news
keeps coming for Australian based international environmental equity funds
and their investors. The latest is DWS Investments' closure of its Global
Climate Change Fund.
Australian
based international environmental funds are a new sector of the funds
management industry that have tried hard to get off the ground, but after
two years and the global financial crisis they are still struggling.
This is a shame,
as locally based funds are a convenient way for Australian environmental
investors to invest internationally, and in normal share market conditions
it would be reasonable for fund managers to expect this to be a growing
market.
The 2007 batch
of funds was the first. Of the six retail funds that commenced that year,
all six have experienced difficulties and three have now closed.
The DWS Global
Climate Change Fund is the third to close and the first to be fully wound
up. The KBC Global Water Fund and the Octaviar Water Fund closed to new
investors earlier this year.
Of the three
surviving funds, all three are underwater.
The Credit
Suisse PL 100 World Water Trust is a listed entity with a capital guarantee
for foundation investors who last to maturity. It has done the best job
in preserving its asset value, with its $1 units having a net asset value
of 94.3 cents and its units trading at around that level. But this is
largely due to support from its responsible entity, which provides liquidity
by redeeming units at their net asset value and canceling them.
The other two
international funds, Australian Ethical World Trust and Hunter Hall Global
Deep Green Trust, are ethical funds with a higher than normal environmental
component. Both have net asset values and redemption prices per unit well
below their $1 starting price.
The problem
for the funds was not the sector - environmental investment will continue
to grow - but of timing - 2007 was the end of the boom market, the wrong
year to start a fund.
There is a
dilemma here for fund managers. They need to start new funds in a rising
market as it is difficult to raise capital in a bear market, but ideally
they should invest those funds in a down market. Yet having raised funds
in a boom they cannot sit on cash and wait for a bust that may not happen.
So ideally a new fund should be raised after a bust or at the start of
a boom. If they raise funds at the end of a boom, it needs to be a small
bust, not a catastrophic one such as this one.
The environmental
funds are not alone. Many international IT and healthcare funds were started
in the technology boom of the late 1990s and were decimated in the tech
bust that followed.
A lesson here
is the role of timing in investment success. The current bear market has
debunked the marketing clique "It's not timing but time in"
and variations on this idea that were espoused by the broader funds management
industry during the boom.
This can now
be seen as a fallacious argument to encourage share market investment
in a boom time. Yes, time in can be important to success, and it can make
up for numerous mistakes. But time in does not always make up for mistakes
of timing. How much 'time in' will boom time investors need to recover
from their poor timing in this case? Most commentators think it will be
many years.
So timing is
not just important, sometimes it is all important. The venture capital
industry has the concept of vintage years. Data over many decades shows
that the year in which funds are started, and thus the period in which
investments are made, has a significant bearing on their success. This
timing can override the skill and experience of individual fund managers
whose performance is also subject to vintage year trends.
We all know
timing is important in life; it can be a huge part of luck; and essential
to some comedy. So if timing is important in every other part of life,
why shouldn't it also be important in the stock market?
To argue otherwise
seems absurd, if not irresponsible. Yet many did argue against timing,
ignored it, or got it plain wrong.
We can now
see that most professional fund managers and many chief executives across
all industries bought high and are now selling low. For example, three
years ago in the boom, property trusts could not buy assets as there were
few for sale; now there are billions of dollars of assets going cheaply.
These are professionals who bought high and are now selling low.
Yet they are
paid to do the opposite, to 'Buy low, sell high'. This strategy sounds
simple but in practise it is very hard to do and that is because it is
about timing. I now also use a couple of variations of this idea: "Buy
in low times, sell in high times", and "Nibble in low times,
take profits in high times", because they better emphasize the time
aspect of this strategy.
Timing will
always be important. Trying to understand timing and the many ways it
can play out in investment markets costs nothing, but downplaying it,
ignoring it or getting it wrong can cost a lot. Timing is one of those
areas where there will always be something to learn, so it is important
to keep thinking about it.
This
article also appeared in The
Business Australian
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