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The case for ‘unfashionable’ active management

18 February 2016

Peter Askew, co-manager of the T. Bailey Growth and Dynamic funds, argues that active managers unconstrained by indices and capable of consistent outperformance are worth paying for.

By Peter Askew,

T. Bailey

The growth in the popularity of passive funds has become a major phenomenon in modern investing, with commentators queuing up to preach the orthodoxy of low costs. But costs are only part of the story.

If cost was the driving force in our lives then the car we would all be driving would be the Dacia Sandero (owned by Renault, built in Romania and retailing for just under £6,000). Look out of your window and you will see that in the real world, car owners also take into account performance, efficiency and a range of other factors.

And we should do the same with investments. Even in the not so distant future when we are being ferried about in driverless cars, there will be a demand for different levels of comfort and performance.

The start of 2016 has been a turbulent one for financial markets. Correspondingly the clamour for passive strategies as the only sensible and cost-effective investment proposition has significantly quietened.

Performance of indices over 2016

 

Source: FE Analytics

Exposure to market indices has appeared less appealing over the past few weeks; the apparent cost of finding a skilled and defensively minded investment practitioner, hitherto deemed to be too expensive and unfashionable, has become secondary to gaining protection in the current market maelstrom.

One of the problems of our industry is that it is still driven by input investing when the customer or end client is concerned with outcomes.

We are still asked how much we have in the US or Europe, which managers do we choose? Why?

In a post-RDR world how many advisers have the expertise or time to devote to sourcing the right managers, to constructing the appropriate asset allocation? 

Can they navigate the choppy waters of ‘emerging markets’? Indeed we heard a leading competitor state that he is going overweight emerging market equities, really? All of them? Where you put your money in the developing world is key, as 2015 has just demonstrated.


 

Another peer has ‘upped’ his alternative exposure. Alternative is such a broad heading that you would have little clue about what exposure that person actually has. The problem is that all the talk is about inputs, when looking and thinking laterally to deliver the appropriate investment solution renders old-fashioned geographic breakdowns less relevant today.

Rather than thinking about your US weighting and making an assumption based on a generic growth rate for the whole economy, why not think about the long-term growth themes that will significantly exceed the GDP forecast for a single country?

While finding good US managers might be tricky, good thematic managers, not constrained by being too large, can deliver a meaningful contribution to a client’s desired outcome.

And what does over/underweight mean? To us it has little relevance as the index or peer group to which that refers is unlikely to reflect the objectives of the end client.

 

Size matters

Commentators repeatedly tell us that active management does not work, but they start at the wrong point.

If you are not trying to run as much money as possible and are not therefore constrained by size – too big to succeed – and you are not a slave to an index, there is no reason why you should not outperform the larger asset gatherers.

However, if you need, from a commercial or share price perspective, to be running as much money as possible and charging a fee for it, then it might be difficult to be active and not look like an index clone.

We know that large pools of money are going into passives but the reason is not that active management does not work; it does – in unfashionable portfolio construction methodology and after fees.

The reality is that it is difficult for large-scale investors (and we are talking about multi-billions) to deploy such quantities of assets effectively without resorting to some use of passives.

 

Why you get what you pay for

DFMs (discretionary fund managers) have become popular in the retail and wealth sector. We are a DFM but one where opaqueness is replaced by transparency under a UCITS structure, as both our funds are.

Our approach – unfashionable? Possibly, but, if you will excuse the self-assessment – fit for purpose? Definitely.

If size, being too big as an asset manager or a large pension fund, is not a constraint, then it is possible to deliver investment outcomes after fees that investors can relate to – above inflation, thus preserving their wealth in real terms.


 

As part of our delivery, investors get asset allocation in absolute terms, not against an index, which should only be used as a reference point not a portfolio construction tool. Good asset allocators need skill and experience – it is not an off-the-shelf product. Experience is important as it teaches you to know what you do not know, that some of your better investment decisions are the ones you declined because you worked hard to find a flaw in amongst the hype.

It perplexes us why anyone – if they are not a multi-billion pound pension fund, sovereign wealth fund or asset manager – would want to constrain themselves as if they shared the handicap of having too much money to put to work. Digging beyond the household names of large investment houses to find investors who share our mantra – consistent performance over asset gathering, unconstrained by indices – is a service that should be worth paying for, as it delivers the investment objective after fees.

Does it work? In 2015 our global growth (equity) product was over 5 per cent ahead of the FTSE All World (after fees) largely through asset allocation and not least through finding good active managers, who invest with conviction and are not constrained by being too big.

Another key reason for being ahead of that index – we ignored it!  Indices may be reference points but they should not be portfolio construction mechanisms.

 

Peter Askew is co-manager of the T. Bailey Growth and Dynamic funds. The views expressed above are his own and should not be taken as investment advice.

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