Walter Scott chief blasts churning

Listening to the “white noise” of volatility and switching in and out of different stocks in an attempt to maximise returns will most probably result in wealth being chipped away — and your brain being fried — according to the man in charge of the Scottish boutique fund manager Walter Scott.

“Our [stock] turnover is under 10 per cent and to do this you need nerves of steel,” managing director Alan McFarlane told Money Management on a recent visit to Australia.

“Every week we produce a package of information on markets and stocks, but out of that 20 pages only a half page is devoted to stocks we have bought and sold,” he added.

McFarlane cites US mutual fund turnovers of 112 per cent and global equity fund manager turnover of 24.8 per cent in 2004 as examples of how wealth is chipped away.

“That deduction for costs of this turnover is 1 per cent of the return,” he said.

“You have to deduct the costs of these trades and I find it hard to believe there are people who are always getting the trades right to justify the costs.”

McFarlane said Walter Scott is “not bothered with the white noise of volatility”. He added: “If we listen to that noise it will fry your brain.

“If someone can trade that way, great, but we don’t think that is the right thing to do.”

Walter Scott was one of the first two managers selected by Macquarie Bank to manage a fund in its professional series.

The fund, which contains between 40 and 60 global stocks, is heavily biased towards Japan, with a 38 per cent allocation, compared to a 9.22 per cent allocation to the US and a 17 per cent allocation to Europe.

McFarlane said the reason why the fund manager favours Japan is due to the growth potential of certain Japanese companies.

“Japan has been through a difficult time, but throughout this period Japan ran trade surpluses,” he said.

“So they must have been manufacturing things people wanted and we see the best of the Japanese companies still have a wonderful potential for improvements in earnings.”

McFarlane said that, by comparison, US companies have proved difficult to run despite a booming domestic economy.

“You can guess which US car manufacturers are lending the money to customers to buy their products,” he said.

“And the Japanese car manufacturers in the US are selling more without these incentives.”

Walter Scott will be targeting superannuation investors in Australia and McFarlane said the fund manager was not trying to generate inflows at any cost.

“We are not asset chasers, our target is the intermediaries market with a focus on the retail independent financial adviser,” he said.