Markets

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

Martin Taylor of Nevsky Capital said goodbye to investors last month in a letter that, as my Bloomberg colleague Mark Gilbert noted, signaled that Taylor may have "lost his appetite for the daily fight to outsmart the market."

Despite racking up a return for his investors of more than 6,400 percent between 1995 and 2015, Taylor said he decided to hang up his cleats as an emerging markets manager of Nevsky and its predecessor because "what we have done has worked brilliantly for twenty years but does not work any more."

Might there be more to it than that?

Taylor cites three primary reasons for his farewell, posted on Zero Hedge, that I find curious. His first reason is the current unreliability of economic and corporate data, particularly numbers from China and India.

Was the data really any more reliable 20 years ago when there was less scrutiny and international accounting standards were less developed? Emerging markets data was difficult to find at all 20 years ago, and very few emerging market indices predate the 1990s. It’s hard to believe that the quantity or quality of data has declined over the last two decades.

Taylor's second reason for leaving the pinnacle of the money management ranks is that in major emerging markets such as China "economic policy makers do not themselves apply economic logic and in a transparent manner."

Granted, the 2008 financial crisis and its aftermath compelled policymakers to take extraordinary and, in some cases unprecedented, action. Currently, China’s leaders are errantly attempting to impose their will on their country's markets, which is also cause for concern. But have investors ever lived through a golden age of policymaking? Was the policy world that much more sophisticated when Taylor started out all those years ago?

Taylor also cites the rise of algorithmic trading models and index funds -- with a related increase in "violent" market moves -- as a third and primary factor in his decision.

I suspect there might be something else forcing such a gifted and prescient investor as Martin Taylor to move on. To his great credit, he has achieved what every money manager wants but few attain: a first-ballot-hall-of-fame track record.

According to Taylor, he returned 22.3 percent annually to investors from 1995 to 2015, while the MSCI Global Emerging Markets Total Return Index returned 6.1 percent over the same period. Taylor must know that it’s not easy to sustain that performance. He concedes that the hurdles he says he faces may lead to a “deterioration in risk adjusted returns.”

Taylor, who also notes that Asia's economic ascent has made his work hours "brutal," has presumably secured a well-earned financial bounty. Now he wants to secure his equally well-earned immortality among investing's brightest lights.  

Peter Lynch popularized the ride into the sunset in 1990 when he closed the books on a legendary thirteen year run as manager of Fidelity’s Magellan Fund. Magellan returned 29.1 percent annually to investors from May 1977 to May 1990, while the S&P 500 Index returned 15.5 percent over the same period.

Belle Epoque
The Peter Lynch era at Fidelity Magellan.
SOURCE: Bloomberg

Consider what happened after Lynch's departure. The Magellan Fund returned 8.5 percent annually from June 1990 through 2015, while the S&P 500 Index returned 9.3 percent over the same period. This twenty-five year period closely matches the S&P 500’s long term return of 10 percent annually since 1926.

In hindsight, Lynch’s tenure at Magellan coincided with a period of good fortune for U.S. large cap stocks. To what extent that contributed to Lynch’s stellar performance, and how Lynch would have subsequently fared if he had remained at Magellan's helm, is open to debate. Still, there’s a very good chance his returns would have suffered greatly had he stayed on.

Tale of Two Eras
The post-Lynch era, 1991-2015, was more modest for both Fidelity Magellan and U.S. large cap stocks than the Lynch era, 1977-1990.
SOURCE: Bloomberg

So Taylor’s decision might actually tell us something other than what he outlined in his note to investors.

First, it is exceedingly difficult to identify market-beating stock pickers in advance. (I mean to distinguish between stock pickers like Taylor and Lynch and systematic actively managed funds, often called "smart beta.") Stock pickers tend to close up after a great run, and liquidate after a recent period of underperformance. To have any hope of capturing an outsize return, one must invest with a manager before he or she has established a track record. Few investors are willing to take that kind of gamble.

Another insight is that real life investment returns are exceedingly more modest than those of hall-of-fame managers. If you want proof, take a look at college endowments. They have all the advantages required for success, including huge pools of money, access to the best managers, and an infinite investment period. Yet, according to the National Association of College and University Business Officers, the average endowment achieved a return of 7.1 percent annually from 2005 to 2014. This is not an aberration. According to NACUBO, college endowments’ target a long term return of 7.4 percent -- a far cry from the high flying returns of star managers. 

So don’t dwell on the fact that economic and corporate data is imperfect and that policymakers are fallible, in emerging markets or anywhere else. It was always thus and will always be so. Focus, instead, on where value resides.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

((Corrects second and tenth paragraphs to note that the performance period was 1995 to 2015, not 1995 to 2013))

To contact the author of this story:
Nir Kaissar in New York at nkaissar1@bloomberg.net

To contact the editor responsible for this story:
Timothy L. O'Brien at tobrien46@bloomberg.net