Another Tiger is extinct

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The Independent Online

In the week most investors have spent filling out their last-minute ISA forms, the big news in the professional investment community has been the dramatic demise of one of the world's best-known hedge fund investors. Julian Robertson, a New Yorker whose Tiger Management group has a track record every bit as good as that of George Soros over the past 20 years, said he was calling it quits, closing all his funds and returning the capital - a small matter of some $6.5bn - to his investors.

This was a dramatic development, akin to Sir Stanley Matthews or Ian Botham announcing retirement. More dramatic still was the reason he gave, that he no longer understands the dynamics of today's stock market. He says it is driven by two unsustainable factors, an extravagant enthusiasm for technology, internet and telecoms shares and relentless pressure for fund managers to chase the latest hot property, regardless of value or common sense.

"The technology, internet and telecom craze, fuelled by the performance desires of investors ... is unwittingly creating a Ponzi pyramid destined for collapse," said the man whose funds over his firm's first 18 years of operation (1980-1998) produced an annual compound rate of return of 31.7 per cent, a better record than Mr Soros or Warren Buffett. For good measure, Mr Robertson criticised the irrationality of aclimate in which "earnings and price considerations take a back seat to mouse clicks and momentum".

It would be foolish to shed many tears for the protagonists in this turn of events. Hedge fund managers are the most highly paid of professional investors, charging an annual management fee, typically 1 to 2 per cent of funds under management, and taking a big cut (20 to 25 per cent) of profits they make on the funds they manage. The funds managed by the Tiger group have grown to a peak of more than $20bn in the 20 years, so it is not hard to work out that Mr Robertson and his colleagues have made themselves a fortune.

Nor would anyone begrudge the 67-year-old founder of the group a wish to go into retirement. Yet the reasons advanced by Mr Robertson for his departure appear disingenuous. His argument is that there is plenty of value now to be found in the old economy, but that his strategy of buying value and selling short hype, having worked so well for so many years, has lost its rationale in a market where momentum - the wild urge to buy what everybody else is buying, regardless of cost or value - has never been so rampant.

The unprecedented degree of hype in the markets today is indisputable. The funds managed by Tiger have suffered more than most, falling by nearly 20 per cent in each of the past two years. More striking still is that, despite Mr Robertson's immense reputation and track record, this two-year patch of underperformance has resulted in investors opting to take back no less than a third of all the money they had invested in Tiger funds. If that is the redemption pattern experienced by a fund manager with such a stellar reputation, you can imagine how great the pressure is on most average fund managers to jump on the bandwagon and buy what everyone else is buying to boost their short-term performance figures.

No doubt, what Mr Robertson should have done is sat back and waited for his distinctive investment style to come back into favour, which it may already be doing. A study of great investors showed all endured periods of up to three years when they underperformed the market, only to bounce back strongly. That option was clearly open to Mr Robertson.

Instead, he seems to have simply tired of the game, which is understandable. What is silly is to pretend the exceptional conditions of the past two years - and the havoc they have wreaked on the careers of illustrious investors - are either sustainable or free of cost. For investors, it underlines the need to be realistic about their expectations and time horizons. If the best brains in the business are struggling to make sense of it all, then it is a dangerous illusion to believe just because your shares trebled in the last year (while Mr Robertson and others have been eating humble pie) that you are somehow now the market genius.

A better approach is to start with a realisation of how little you know, not how much. As the professional investor Paul Melton nicely puts in an interview in a book of interviews (Trading the World's Markets, edited by Leo Gough and published by John Wiley), "allowing for your own ignorance is intelligent". That does not mean being in awe of other investors with seemingly greater knowledge and skill, nor of following the professionals chasing charttopping short-term performance at any cost ("I keep remembering" says Mr Melton neatly "that the Titanic was built by professionals but amateurs built the Ark").

The business of investment is not about achieving the highest absolute returns at any price, but about securing a satisfactory result that's the best you can hope to achieve, given your objectives and tolerance for risk. It involves securing the right degree of diversification and avoiding buying only the flavour of the month things. Everyone will have their own take on what precisely is involved. Paul Melton is a serious and well-respected investment analyst whose qualifications might not at first strike you as convincing; he is a former TV actor and director who now manages funds and publishes a global investment newsletter from Amsterdam.

He argues that for relatively sophisticated investors with more than £30,000 in accumulated savings, the best route lies in investing globally through low-cost funds, with the objective of securing broadly an equal weighting in all the major markets of the world. His point is that investors who stick solely to their domestic markets are unconsciously taking on extra risk. Whatever its merits as an argument, it is undoubtedly true when your domestic stock market is as overvalued as it is for UK and American investors. He expressly argues against doing what most professionals again do, which is to allocate their assets on the basis of different countries' relative market valuations at the time, a strategy that leads you to the absurdity of putting 70 per cent of your money into Japan in 1989 and overweighting the US market today.

The most potent piece of advice Mr Melton has for ordinary investors applies whether you invest overseas or not. It is to avoid tinkering endlessly with your portfolios - reviewing and rebalancing three times a year is enough if you have a well-diversified portfolio.

"Don't fall into the trap of managing your holdings according to newspaper headlines, soundbites, mindless predictions, gut feelings or last time period results," he says. "Resist the temptation to tinker endlessly, second-guessing yourself. Cancel your subscriptions to tip sheets, and refuse to be sucked into predictions of interest rates or market corrections. You're better off spending time at the beach with someone you love or reading a great book."

After last week's events, the chances are you might even find yourself under a parasol next to Julian Robertson.

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