They don’t get the tour jackets or the teenage groupies, but when it comes to prancing and posing in public, many portfolio managers could give The Rolling Stones a good run for their money. As individual investors have increasingly turned over their loot to mutual funds, and billion-dollar corporate pension funds have steadily grown in bulk, money managers have acquired unprecedented power. They are courted by brokers who want their trades, and coddled by corporate managers who need their support to raise capital. Those fund managers who establish reputations as hot stock pickers are widely quoted as authorities on a vast array of subjects. And when it comes to corporate takeovers, such as the rivalry for Lac Minerals Ltd. of Toronto this past summer, institutional investors can make or break a bid. Similarly, when senior executives undertake any initiative that requires shareholder approval—as the crew at John Labatt Ltd. of London, Ont., recently discovered when their poison-pill proposal was resoundingly rejected— they are often at the mercy of a handful of major shareholders.
But everyone is ultimately accountable to a higher power. And for fund managers, the end of September is one of those occasions when that lamentable fact is driven home. The end of September, you see, is the end of the third quarter of the fiscal year. And every three months, they must account for their performance to those who actually own the billions of dollars that they toss around in the financial markets. Every quarter, fund managers are expected to outperform some benchmark index and to justify any stock positions that fail to keep pace.
This short-term pressure on vast sums of money, which are held captive in a relatively small domestic market, creates some intriguing patterns of activity. As each quarter draws to a close, there is a flurry of trading on the Toronto Stock Exchange as edgy fund managers scramble to ensure that they have all the current darlings in their portfolios and that they have disposed of most of their mess-ups. In many cases, even
the shares in a company that is poised for a dramatic turn around, like Magna International of Markham, Ont., get dumped so that fund managers preserve their sterling—if shortsighted—record of performance.
But the frantic dash to the finish line every three months has some grave consequences for the corporations whose public shares are used as the pawns in this game. In fact, the singular focus on immediate results is often downright detrimental to the longer-term requirements of a growing firm. Companies, like people, have different needs at different points in their development. But those fixated on instant gratification cannot afford to make such allowances. And when senior executives are attempting to ease their companies into a new direction, a volatile equity base can render them vulnerable to a capital crunch or a premature takeover.
If a new corporate acquisition takes longer than expected to integrate, or a recent asset sale causes dislocation elsewhere in the company, its stock may come under fire. That often forces management which is dependent on public markets to finance the strategic plan, to compromise it. Having eagerly endorsed Toronto-based American Barrick’s bid for Lac Minerals, for example, it is almost certain that institutional investors will drive down Barrick’s share price while it is still in the throes of digesting its new purchase. Even the prospect of a longer-term payout is not sufficient to overcome the aversion to shortterm disarray. And the resulting higher cost of raising money—either debt or equity—can disrupt the best-laid plans.
Of course, none of this means that ineffectual executives who regularly whine about the tyranny of quarterly pressure should remain unchallenged. Nor does it mean that the market’s verdict on a company and the deployment of its assets should be disregarded for very long. But it is always worth remembering, while poring over the latest rankings of fund performance, that Rome wasn’t built in 90 days.
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Mutual fund managers are under far too much pressure to make a quick buck
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