Focus Group: Time to get active?
Almost half of the investors polled in this month’s Focus Group, 12 out of a total of 25, state that active equity management within their investment strategy has increased over the past decade. Overall, respondents mostly have active management mandates in their portfolio.
For seven respondents the passive element has increased while for eight the balance has remained stable during the past 10 years.
More than two-thirds agree that higher valuations, as well as volatility in equity markets, make active management attractive in terms of potential value. A UK fund says: “Passive management forces an investor to invest in something they would never want to invest in.”
The CIO of a Dutch fund adds: “The risks are increasing and with passive management it is sure that you will go down when the risk emerges.” However, nine funds disagree, with another Dutch fund commenting: “Active management is seldom attractive and over the long run almost always negative versus passive.”
Five funds are planning to raise their use of active equity management. The CIO of a Swedish fund says: “We are already 100% active, but we hope to be even more determined (or aggressive) in our investment decisions in the future.”
Just two funds are planning to decrease the passive element. A UK fund says: “We look at equities as a beta play. The cost per unit of any alpha to be gained in most markets is too expensive.” Twenty-one funds are not planning to change their balance of active and passive.
Twenty funds state their active managers are tasked with beating a benchmark, but a large tracking error is permitted. A further six expect active managers to beat a benchmark, but with a low tracking-error requirement. Two funds do not use benchmarks to assess active management mandates.
A 2014 paper published in the Journal of Finance found “no evidence” that consultants’ recommendations add value in searching for “winners” in investment management. Twenty-seven say it is possible for investors and consultants to select active managers successfully. “There is evidence that active managers beat the benchmark and we believe that, through a very thorough screening/due diligence process, we can find enough such managers for our active approach to add value,” says a Danish fund.
A Spanish fund adds: “With a sound and disciplined selection method, it is possible to select managers that perform in the upper quartile of returns and alpha in the mid to long term.”
When choosing an active manager, 24 respondents look for solidity of the investment strategy; 16 consider cost; 15, past performance; 11, active share; seven, the concentration of the portfolio; and six, the Sharpe ratio and assets under management.
A UK fund states: “We would buy a theme and expect the manager to stay true to the theme.” For a Dutch fund, any active manager it selects “must be able to perform within [the] rules of [an] ESG policy.”
More than two-thirds of respondents say that active managers are overpaid. “Obviously, most managers are grossly overpaid since we can do it ourselves at a fraction of their price,” says a Swedish fund. Five funds say active managers are rewarded fairly.
Nineteen respondents state low-turnover, concentrated strategies will add value to their portfolio in the future, while 17 highlight absolute return strategies; 13, low volatility, quantitative strategies; and seven, high-turnover, high-tracking error strategies.
Twenty-three funds currently use actively managed global equities; 18, European large and mid caps; 15, emerging market Asian equities; 13, respectively, European small caps and North American large and mid caps; 12, North American small caps; and 10, developed Asian equities.