Ver­sus de­bate

Finweek English Edition - - IN MY VIEW -

one would ex­pect. An anal­y­sis of the full uni­verse of pas­sive unit trusts that tracked the Alsi and Top40 bench­marks over the last 10 years shows that the aver­age un­der­per­for­mance of this uni­verse has been a stag­ger­ing 0.95% per an­num, at least twice the num­ber I would have ex­pected. We do not have ac­cess to the un­der­ly­ing data, but I think that the bulk of the per­for­mance gap has come from pas­sive man­agers charg­ing ac­tive-type fees for a pas­sive ser­vice (the aver­age fee charged by pas­sive unit trusts seems to be around 0.57% af­ter VAT). Sec­ond, it re­ally should not be a sur­prise that so many ac­tive man­agers un­der­per­form the mar­ket af­ter fees, if you think about it enough you re­alise that the de­bate around the ef­fi­ciency of mar­kets is a red her­ring. Al­pha is af­ter all a zero-sum game, given that the sum of all in­vestors’ re­turns can­not ex­ceed the to­tal re­turn of the mar­ket. This makes it close to a math­e­mat­i­cal cer­tainty that the ag­gre­gate re­turn of all ac­tive man­agers will not beat the mar­ket. Once you add in fees and other costs many ac­tive man­agers ac­tu­ally un­der­per­form.

This takes us to the key point: in­vestors don’t buy the full uni­verse of ac­tive man­agers.

I have yet to meet a client that has bought each and ev­ery one of the 130odd gen­eral eq­uity unit trusts avail­able to­day. Most of them, with the sup­port of an in­de­pen­dent f inan­cial ad­viser in the re­tail mar­ket, or an as­set con­sul­tant in the in­sti­tu­tional mar­ket, will di­ver­sif y their ex­po­sure be­tween three or four ac­tive man­agers. We at Corona­tion don’t think that the task of iden­ti­fy­ing the win­ning long-term ac­tive man­agers is that daunt­ing.

A port­fo­lio of the long-term win­ning ac­tive man­agers has de­liv­ered out­sized re­turns when com­pared to the mar­ket (as well as sig­nif­i­cantly bet­ter risk and vo­latil­ity met­rics). Over long pe­ri­ods of time the num­bers have, in fact, been noth­ing short of re­tire­ment chang­ing. Will ev­ery one of these ac­tive man­agers out­per­form in the fu­ture? Prob­a­bly not, but I’d hap­pily bet that a bas­ket of them will com­fort­ably beat the mar­ket af­ter all fees and costs. PAS­SIVE FUNDS AND AS­SET AL­LO­CA­TION The most im­por­tant task in in­vest­ing

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