Now before you all think I have lost the plot please bear with me. I believe in active management, although I accept there are times when passive is best and I have and will use it where I feel it is appropriate.
Now the FCA has just produced a report on the active fund management sector and has not been particularly complimentary. They said “Our evidence suggests that actively managed investments do not outperform their benchmarks after costs and that some active funds offer similar exposure to passive funds, but charge significantly more.”
Now you may think this sounds like I should be running for the hills and denying all knowledge of this? Yet I agree with the FCA, almost. I would change the wording to “most actively managed investments” and this is a really important point to highlight. There are an awful lot of mediocre funds out there and very often they are the most widely held.
The most important point I want to make which has been missed from this report, and always gets missed by advocates of passive investing when they make the same arguments, is that good active management will beat passive management. We as investment managers have a responsibility to continually question where we have clients’ monies invested and a duty to seek out better alternatives.
We cannot rely on ratings as inevitably they will be given to funds that have a good track record but does not take into account how they are going to perform going forwards. Surely this is all that matters?
We have to steer away from the industry mega funds that have become closet trackers as this is the way to self-regulate. This does not mean that all large funds are bad, in fact some are excellent, but it should mean that we also have to look for those funds that the retail investor would not find for themselves, otherwise what are we being paid for? This involves smaller funds, newer funds and funds that don’t necessarily have a great track record.
The constant striving for cheaper and cheaper investment options is the wrong way to go, it misses the point of why people should invest. The rise and rise of the passive industry is its own form of bubble and there will come a point where investors will realise that there is no substitute for a properly managed, diversified portfolio of active funds.
Unencumbered by legacy holdings, not needing to keep several egos happy on a committee and the ability to buy smaller funds without the fear of not being able to liquidate my investment at a later date because I own too much of the fund is what I offer.
Good active is better than passive and don’t let anyone tell you different when they are comparing mediocre active to passive!