Book reviews aren’t usually my thing, mostly because two young kids and a wandering mind makes it difficult for me to read anything substantial from cover to cover these days. Which is why a nice short essay, recently published in the Financial Analysts Journal, is my chosen specialist subject for the month.
Said article has been written by John C Bogle, the legendary founder of the first index fund, and comments on the lessons learned over his 65 years in investment management. His seven lessons for investors are salient for charities with long-term assets.
He starts by affirming the need for investment if capital is likely to be held for the long term: "The biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates." For long-term charity investors, in a world of low interest rates outpaced by inflation, holding on to excess cash on the balance sheet can be costly in real terms.
For lessons two and three, Bogle points out that "time is your friend" but "impulse is your enemy": that long-term investing is a virtuous habit leading to superior returns, and that emotional decisions can hinder performance. Charity investors often have the benefit of these long-term time horizons, with endowments looking out to perpetuity. However, governance structures should be robust enough to protect against reactive, emotional decision-making when markets are more difficult in the short term.
The fourth lesson highlights the potential erosion of returns through costs. It is perhaps unsurprising that Bogle, as the father of index funds, believes in the importance of keeping expenses low. However, irrespective of passive or active management, all managers should be able to demonstrate the value that they add to the charity investor, considering how much return has been generated for every pound paid in fees.
For Bogle's fifth lesson, simplicity is espoused as an attractive trait of a well-constructed portfolio, balancing risk, return and cost. He discourages alternative investments, omitting them entirely from his "basic portfolio", I suspect because he's unconvinced by the higher fee structures implicit in many of these approaches. Simplicity does have its benefits: I have long fought against the battle of city speak and jargon and am certainly of the view that if it can’t easily be explained it is probably not appropriate for an average charity investor.
For his penultimate lesson, Bogle reminds us of a common mistake: picking the fund manager with the best performance, in the expectation that it will continue. Under the heading "never forget reversion to the mean", Bogle quotes the bible: "So the last shall be first, and the first last" (Matthew 20:16, King James Bible). Although it is important for charity investors to keep performance under review, it is not always the best course of action to jump ship after a bad spell.
Finally, Bogle highlights the "single most devastating mistake you can make as an investor" as changing your strategy at the wrong time. The importance of being able to set an investment strategy and stay the course is emphasised and is, in my view, a sign of a high-performing investment committee.
Kate Rogers is head of policy at Cazenove Charities