INVESTOR’S NOTEBOOK STEPHEN CRANSTON
It is no accident that Old Mutual Corporate Consultants head Hugh Hacking favours the same spiky hairstyle as the boxing promoter Don King. Last week he organised, at a discreet hotel in Melrose Arch, a punch-up (at least in the verbal sense) between four colleagues representing active management, multimanagement and passive funds — as well as Old Mutual’s controversial smoothed bonus products. There weren’t as many punches as Hacking promised at the beginning. There was no talk of the notorious market value adjuster imposed by smooth bonus funds, which penalises pension fund members who have to leave before retirement during a bear market — just the people you would have thought these products should be protecting. And I know from my own experience how difficult it is for a retirement fund to disinvest from this product.
It is rare to hear the case for active management, and Old Mutual’s revolved around the fact that the Edge 28 portfolio has significantly outperformed a neutral balanced fund asset allocation over 20 years. And the argument for passive investing was almost entirely focused on lower costs. You just need to compound the difference between a 1% and a 0.5% charge — though 0.5% for passive still looks high, especially for an institutional portfolio.
Quite coincidentally, after I had left this rather tame boxing match I was sent quite a detailed argument for active asset management from Paul Stewart, head of fund management at Grindrod.
He says passive investing is an idea that has blossomed thanks to the spread of technology, which has democratised ideas.
He says owning a portfolio that mimics the constituents of a published investment index is now hip and trendy (perhaps that is overstating things but they are undoubtedly more popular than ever.)
In his somewhat baroque prose Stewart says the passive barbarians have arrived and are pounding on the city gates.
Are the active managers about to lose their lunch or their lives? Quite appropriate, as many are legends in their own lunchtime. He says many fund managers have become fat and happy. Recently, the great finance writer Charles Ellis pointed out that fund management might well be the highest-paid trade in the world, but does it deserve to be in terms of its added value? There are fund managers such as Allan Gray, Peter Lynch and Bill Miller, even a rough diamond such as Dave Foord, who have been able to earn their fees and more through their stockpicking. But, as Stewart says, the suggestion that fund managers as a breed have clairvoyant powers is incorrect.
Nonetheless, he says the focus must be on selecting the best strategy for the achievement of the individual investor’s long-term goal. The debate over active and passive management is a sideshow. The main goal for most investors is to build a capital base capable of funding an income after retirement. They shouldn’t be worried about whether their funds outperform an index over one year or even three years. Stewart says very few investors are inherently suitable passive investors. A passive portfolio may not be an appropriate asset structure to match the funding of future retirement income, he argues — though there are an increasing number of passive multi-asset products coming onto the market. And, choosing a passive portfolio requires an active decision — which index, which asset allocation, which risk tolerance? Baseball great Yogi Berra said it was difficult to make predictions, especially about the future. Active managers should listen to this. They should focus on building a repeatable investment process which can bring the right level of consistency to funds.