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Why it’s been a “terrible year” for active fund management

18 December 2014

Four Capital’s Mike Pinggera tells FE Trustnet why 2014 has favoured passive over active investing and why that is about to change.

By Daniel Lanyon,

Reporter, FE Trustnet

The active versus passive debate has heated up this year with record inflows into tracker products and radical proposals from the £180bn Local Government Pension Scheme to switch out of actively managed funds into cheaper passives.

A renewed focus on charges from investors, as well as a price war from some of the biggest passive providers such as Vanguard, Fidelity and Legal & General, has boosted their popularity in recent years and led to trackers accounting for 10.9 per cent of assets in the IMA universe.

According to the Investment Management Association, tracker funds saw net retail inflows of £590m in October 2014, a record level, despite markets falling for half of the month.

The year has seen an increasing tendency for active managers to ‘hug benchmarks’, which has contributed to a calamitous year for actively managed portfolios, says Four Capital’s Mike Pinggera.

Pinggera, who runs the FOUR Multi Strategy fund that sits in the IMA Targeted Absolute Return sector, says choppy markets have encouraged managers to up their risk aversion.

“It has been a terrible year for active management with too many managers sticking to their benchmarks,” Dunne said.

“In the last few weeks things have certainly improved with the outlook for next year looking a little better. With what is happening in emerging markets with currencies and oil there potential banana skins out there, which will help active managers.”

“If you run a global portfolio with 50 per cent in America there is a concentration risk already and so having more is even more of a risk, but as fund managers it is important to put clarity into the environment that we are operating in.”

Looking at funds in the UK equity space, just 70 of the 271 funds - about a quarter - in the IMA UK All Companies sector have beaten the FTSE All Share this year. The numbers are better in the IMA UK Equity Income sector, where 60 per cent of funds have beaten the All Share.

This disparity is in part down to the outperformance of defensive large caps to more growth oriented mid-cap names for most of the year.

However, as the graph below shows, mid-caps are currently the best performing part of the market with the FTSE 250 down just 0.66 per cent compared to the FTSE 100 which is down 2.86 per cent.

Performance of indices in 2014



Source: FE Analytics

Most of this downside has come over the past month or so due to the continuing slide in the oil price, which has affected the oil majors at the top of the index such as BP and Royal Dutch Shell and caused them to take some of the biggest hits.

Over the previous 10 calendar years only in 2011 did a lower percentage of funds fail to beat the index in the UK All Companies sector, when just 21.3 per cent of funds stayed ahead.

In the IMA Global sector the situation is not much different with just 25 per cent of funds ahead of the FTSE World index this year, compared with 23.6 per cent in 2011.

The IMA Global Emerging Markets sector is arguably even worse. While approximately 30 per cent of funds beat the MSCI Emerging Markets index in 2014, this is the worst proportion of the sector in 10 years. In 2004 25 per cent of the funds made returns higher than the index.

Alan Sippetts, investment director at Heartwood Investment Management, says the growing popularity of passive funds is becoming a bigger threat to active management.

“ETFs and tracker funds are an obvious threat to active managers of single asset class funds due to the proliferation of passive vehicles in the last few years, accelerated by the arrival of US ETF managers into the marketplace. But that’s from a single asset class perspective,” he said.

“For active multi-asset class managers, who invest across the full spectrum of investment instruments, the broader choice of funds provides more levers to add alpha. The increased number of funds includes many with niche investment mandates, allowing specific themes to be pursued.”

“Also, the lower dealing costs and quick trading associated with ETFs allow active multi-asset class investors to switch between funds more easily, and at limited cost. Multi-asset managers have more opportunity to add alpha through an active tactical allocation process, and should openly welcome the increased number of ETFs. These are essential tools, not second class citizens to be looked down on.”

FE Trustnet has looked at the active versus passive debate on several occasions this year as interest increases amongst advisers and investors.

For example at the start of the year Rob Gleeson, head of FE Research, reviewed the academic theories behind the debate while past studies have also looked at the various metrics investors can use to identify truly active managers. 

Meanwhile, Premier’s Simon Evan-Cook recently argued that ‘closet trackers’ are the real enemies in the active versus passive debate, as they smear the reputation of active management by charging high fees for exposure and returns that are in line with the index.

“While we frequently lock horns with the passive camp, we think the real enemies are closet trackers. This sub-sector of the investment industry masquerades as active management to justify higher fees, but provides a service that is little different (and frequently inferior) to cheaper index trackers,” he said.


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