22nd November 2024
We are unashamed advocates of active management but tend to try and avoid the whole active versus passive argument given how polarising and reductive the debate has become. We recognise that passive has a role to play in many investor portfolios and that in an environment of large-cap dominance they have done a pretty good job. Despite what some of the more evangelical posts on LinkedIn might have us believe, recognising this does not, however, mean that active management is the devil or even worse dead!
We do accept that there is quite a lot of rubbish out there, with too many active managers that are either running too much money or are so fearful of career risk and underperformance that they end up hugging the index whilst charging an active fee. The two are often related with asset growth typically coming at the detriment of active share. The existence of these (in)active managers inevitably skews the much-cited numbers regarding the percentage of active funds that underperform, but we strongly believe that certain managers are structurally better placed to deliver alpha than others. Refining the active funds universe in line with an established set of selection criteria vastly improves the probability of identifying those managers that can add value over the long term in our view.
So what do we look for? First off, we tend to like small teams where individual accountability is high and where decisions can be made quickly and efficiently. Managers should be aligned with investors either by having skin in the game or by operating within a corporate culture and remuneration structure that incentivise the delivery of good performance over asset gathering. Funds should be capacity constrained appropriate to their market. Running less money confers a manager with a liquidity advantage in terms of moving in and out of positions and nimbly shifting the portfolio around whereas running too much money shrinks a manager’s opportunity set. We also look for managers who blend humility (hubris is very dangerous in asset management) with the requisite confidence (and pain threshold) to stick to their investment process and to focus on absolute returns as opposed to benchmark relative ones through the inevitable difficult times. This set of guidelines results in a distinctly finite list of candidates for inclusion in our funds.
We wrote about manager selection earlier this year with the prompt for this revisit being some research we recently carried out looking at the performance of all of the open-ended funds currently held within our flagship Vanbrugh fund versus a relevant passive. The results show that based on each individual holding period, 78% of our active OEICs have outperformed net of costs and that returns have been positively asymmetric with our ‘winners’ outperforming to a much greater extent than our underperformers have lagged. There might be some survivorship bias within the analysis, although turnover of open-ended funds in terms of brand-new entrants and full exits has actually been fairly low. Once we find a talented, unconstrained manager that meets all of the above criteria, we tend to stick with them, recognising that sometimes their process or style will underperform but that the long run numbers are likely to continue stacking up.
This is not intended to be a trumpet blowing exercise, but rather a reflection of how important it is to demonstrate to our investors the important role that active fund selection has played in the sector beating returns our Funds have delivered. This is especially true in the current day and age where too many fund selectors and investors conflate cost and value (not helped by regulation). Adopting a fund of funds approach is in reality a commercial nightmare given the impact it has on aggregated OCFs and given the inexorable shift to low-cost investment solutions. We truly believe, however, that the best way of generating superior net return is by employing experts in their respective fields – whether that be Asian equity income, European structured credit or whatever. We won’t let the cost tail wag the investment dog and continue to almost exclusively use active funds to populate our portfolios.
The active management industry gets a bad press, rightly so in some quarters, but for those who know where to look, perhaps there is life in the old dog yet.
Ben Mackie – Senior Fund Manager
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