Recently the debate over how best to discover active managers has turned to ‘active share’, which is a measure of how different the portfolio is from its benchmark, with some commentators saying this is the best way to find out how active a manager really is.
Simon Evan-Cook, senior investment manager on Premier’s multi-asset fund range, last month argued that more attention should be paid to active share as it can help investors avoid ‘closet trackers’ - or equity funds that stick close to benchmark but market themselves as and charge the fees of genuinely active funds.
The manager, whose research into this area suggests 30 per cent of money in the IMA’s two main UK equity sectors is held in closet tracker funds, added: “Unfortunately, active share is not widely used by the industry yet, and it is certainly not understood by the investing public. We hope this will change.”
However, analysts at Numis Securities have analysed the flagship funds of the UK asset management houses it covers to find out how many have a high active share.
Numis said: “In our view a score above 50 [out of 100], and certainly above about 70, intuitively suggests that the manager is actively managing the portfolio as opposed to just being a closet tracker and is at least attempting to justify the active management charges.”
“We believe it is encouraging that most of the flagship funds we have identified for companies we cover have relatively high active shares. We believe this exercise, whilst by no means a complete test, goes someway to validate those claims that the managers are acting in a genuinely active way.”
Source: Numis Securities Research
In the below article, we will take a closer look at the funds with an active share of more than 90 per cent.
As the table above shows, the fund highlighted by the research as having the highest active is James Inglis-Jones and Samantha Gleave’s £255.6m Liontrust Global Income fund, with a score of 97.2 per cent.
Since Inglis-Jones took over the portfolio in March 2009 (he was joined by Gleave in September 2012), it has made first decile returns of 133.47 per cent, making it the sector’s best performing fund. As a point of comparison, the average fund in the IMA Global Equity Income fund is up 106.53 per cent while the MSCI AC World index has risen 114.30 per cent.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The managers use the Liontrust Cashflow Solution process, which targets stocks that are cheaper than the market and have cash returns on operating assets that are better than the market. The process seeks to identify the best 20 per cent of companies on the combination of these two measures.
The four FE Crown-rated fund’s largest holding is Newcastle-based transport business Go-Ahead Group, followed by AstraZeneca, Next, British Sky Broadcasting and Total. It has 45 per cent in the UK, which may put off investors who already have significant exposure here, with just 2.5 per cent in the US.
Liontrust Global Income has a clean ongoing charges figure (OCF) of 0.91 per cent and yields 4.71 per cent.
Numis’ research also show another two of Liontrust’s ‘main’ funds have an active share of more than 75 per cent - the £1.4bn Liontrust Special Situations fund, run by FE Alpha Manager duo Anthony Cross and Julian Fosh, and the £569.1m Liontrust Macro Equity Income fund headed by Jan Luthman and Stephen Bailey, who are also both FE Alpha Managers.
Alexander Darwall’s £2.6bn Jupiter European and the £2.5bn Aberdeen Emerging Markets Equity fund, managed by a team headed by Devan Kaloo, are the other two funds flagged by Numis as having an active share above 90 per cent.
The five FE Crown-rated fund has been managed by Darwall since January 2001, over which time it has made a total return of 229.77 per cent. As the graph below shows, this is significant outperformance against its FTSE World ex UK benchmark and the average fund in the IMA Europe ex UK sector.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Jupiter European is currently first decile in its peer group over one, three, five and 10-year periods, as well as over three and six months.
FE Alpha Manager Darwall is one of the most highly regarded European equity managers. The FE Research team, which has the fund on its Select 100 list, describes his track record as “outstanding”, noting that he did a “fantastic job” of protecting capital in 2008’s down market but did “extremely well” in the rebound years of 2009 and 2010.
The FE Research team added: “Darwall’s approach to investment does not look original on paper, but the quality of his analysis makes all the difference.”
“He has impressed with his detailed knowledge of companies – not only does he try to assess their future value compared with their current worth, he wants to understand how they will differ from their competitors over the long term.”
Jupiter European is a 1.03 per cent OCF. According to Numis, its active share is 94.7 per cent.
Aberdeen Emerging Markets Equity is a firm favourite with emerging market investors, thanks to its strong long-term track record. Over 10 years, it’s returned 300.58 per cent compared with a 199.96 per cent rise in the MSCI Emerging Markets index and the 185.32 per cent average gain in the IMA Global Emerging Markets sector.
Performance of fund vs sector and index over 10 years
Source: FE Analytics
The fund has outperformed the MSCI Emerging Markets index in seven of the past 10 full calendar years, with the exceptions being 2004, 2007 and 2013. It’s also beating the index and the sector over 2014 to date with a 6.54 per cent gain.
Square Mile, the investment research firm, points out that the portfolio’s construction and returns can often look very different to those of the benchmark: “The unconstrained mandate and the emphasis on quality means that the fund can deliver a highly variable performance relative to the index, although in general, it has tended to defend well in falling markets.”
“The fund may not suit investors that seek benchmark-like returns but we think it holds appeal for investors with a long-term horizon.”
The portfolio’s largest geographical exposure is to China at 16.9 per cent of the portfolio, although this is an underweight to the benchmark. It also has 14.8 per cent in India, 12.7 per cent in Brazil and 7.9 per cent in Mexico.
Aberdeen Emerging Markets Equity has ongoing charges of 1.23 per cent, although Aberdeen has a 2 per cent initial charge to stem flows into the portfolio.
However, not all commentators are convinced that active share is the be-all-and-end-all when it comes to search for truly active managers. In a coming article FE Trustnet will examine why all the recent attention on active share might be overdone.
