The high levels of uncertainty caused by the ongoing coronavirus pandemic suggest investors should have a tilt towards active managers over passive, according to Benchmark Capital’s Alex Funk. 
Funk heads up the recently launched Schroder Portfolio range, which is a suite of six risk-aligned funds that take a multi-manager approach. The investment approach is based on asset allocation and exposure to both active and passive investments.
The investment philosophy behind the range essentially deconstructs total return formula into its simplest components of alpha and beta, he explained. The fund blends both active and passive strategies, tilting towards whichever looks best-placed for current market conditions.
“We understand that passive tends to outperform active in markets that are looking quite positive from a sentiment perspective, or what we call the momentum play in the market,” the Benchmark Capital chief investment officer said.
“That herd trading might be off the back of massive government stimulus, interest rate cuts or fiscal policy driving that momentum in the market. Then you really want to pick that up through increasing your passive allocation.”
Performance of equity indices over 3 months
Source: FE Analytics
But despite the trillions of stimulus that have been pumped into the global economy over the coronavirus crisis, and the sharp rally that followed the initial crash, the Schroder Portfolios funds currently have 60 per cent of their portfolios in active funds.
This is the maximum allocation to active they can take, while the highest the passive exposure could go to is also 60 per cent.
“When the world is looking quite nervous, probably where we are today, you want to increase the allocation to active managers,” the manager said.
“That's across the board because you want to avoid certain sectors and broad-based indexes. You want to enhance that downside protection for investors.”
Among the active strategies in the funds’ 10 holdings are names such as CFP SDL UK Buffettology, LF Miton European Opportunities, First State Global Emerging Markets Focus and JOHCM UK Dynamic. They sit alongside passive offerings like Vanguard FTSE 100 Index, HSBC American Index and Vanguard Global Corporate Bond Index.
In fact, the Schroder Portfolio range have been at its maximum active allocation since its launch on 19 March this year.
This launch date meant that the funds missed the bulk of the coronavirus crash and opened their doors at the start of a market rally that saw many of the heavy losses recouped in a matter of months.
But this didn’t mean that the funds added to passive just to capture the momentum trade.
“A lot of the discussions was about: ‘We're seeing all the stimulus and markets are rallying, don't you want to be passive in order to pick up all of that?’” the manager said.
“And the fact of the matter is, the uncertainty is not out the market - this is just the stimulus trade. We don't tend to flip on active-passive on a day-to-day basis, more on a quarter-by-quarter basis, because we want to avoid trading noise.”
Since launch in March, the six funds have performed relatively well with total returns ranging from 25.76 per cent from Schroder Portfolio 8 (the highest-risk of the range) to 12.66 per cent from Schroder Portfolio 3 (the lowest-risk). Most of the funds in the second quartile of their respective multi-asset sectors, with two in the third quartile.
Performance of funds since launch
Source: FE Analytics
“If you look at the fund underlying contribution, we have generated more from our active component than from our passive,” Funk said.
“It's not only because we’re overweight, but because these active managers have just been better positioned to avoid these key areas such as energy, financials and travel, which have just been battered more than others. It really has shown the benefit of taking active positions.”
In terms of their risk-adjusted returns, the five of the six Schroder Portfolio funds are in their sectors’ second quartile for their Sharpe ratios with just one in the third.
While markets appear to have calmed down from the brutal conditions of February and March this year, Funk cautions investors against expecting the smooth conditions of the years leading up to the coronavirus crisis.
After all, despite massive amounts of stimulus and rising stock markets, many countries continue to struggle with the coronavirus outbreak and few are now expecting the hoped-for V-shaped recovery.
“We think volatility is not gone. And remember, volatility can be on the upside and on the downside - you can have volatility as markets run as well,” Funk concluded.
“We just want to protect investors. I think markets are in store for a bit of a rough ride.”