InvestmentsOct 1 2020

Partner Content: Searching for the very best managers

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Close Brothers Asset Management
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Supported by
Close Brothers Asset Management
Partner Content: Searching for the very best managers
Pexels/Burak K

Whilst it’s difficult to argue against their popularity, should passives be the default option or are above-average returns possible by investing with an active manager?

Looking at the UK, and specifically at the monthly returns over the last 20 years for all funds in the IA UK All Companies sector (255 funds currently), there have been 139 months when the index has produced a positive return and 101 months when the return has been negative. In those negative months, the average active manager performed better than the index in 64 of them or 63% of the time*.

Whilst interesting and encouraging for active managers in its’ own right, it is important to note that this only considers the average manager. Of course, by definition the ‘average’ active manager will perform in line with the index, but there is some evidence that the best among them fare better in more difficult environments than their passive peers.

Within the Close Managed Funds range, ‘average’ is not the pond we are fishing in – we are always trying to find the very best global fund managers in every sector.

Let’s take a step back and think about what an active manager is trying to do. Simple passive strategies typically ‘own’ the whole market, whether poor, average or good companies; active managers try to isolate the leaders of the pack. They don’t want mediocre.

They want to find an edge by ‘out-analysing’ the market and so will focus on elements like balance sheet strength, the ability to survive tougher times, to disrupt competitors or even overthrow the very industries which spawned them. Essentially, they are looking for investments that will do well in the future.

This is at odds with the index, which by definition is an index of yesterday’s winners. So while few managers could have predicted the current crisis, many are likely to have held up better and are able to react more rapidly as events unfold.

Want alternatives? Be active

There are, of course, areas where the ability of an active manager to outperform a passive fund are greater than others – especially where independent research can add value, perhaps  in small-cap companies or high yield bonds. In our opinion, one area that should only really be managed actively is ‘alternatives’.

But before we dig a little deeper to explain, let’s ask ourselves why might we want to consider alternatives in the first place?

Across the industry the term ‘alternatives’ is used rather broadly. Perhaps the easiest definition is that they are a ‘catch-all bucket’, essentially anything that doesn’t fall in to the traditional investment categories of shares, bonds or cash. We broadly split them into:

  • Real assets (like property or infrastructure)
  • Commodities (like gold or oil)
  • Absolute return funds

One reason you might include these in any multi-asset portfolio is that they have different drivers of return and therefore should behave differently to shares or bonds.

Why is this important? Put simply, differing drivers of return provide useful diversification benefits and a well-diversified portfolio will likely produce much smoother performance, helping you, and in turn your clients, to sleep more soundly at night.

So what is an absolute return fund anyway?

Many investors will have a general understanding of alternatives such as property or commodities, but absolute return funds can seem a bit daunting. These are merely funds that aim to make a positive return, irrespective of the direction of the markets, and the term ‘absolute return’ is often used interchangeably with ‘hedge funds’, albeit this can have both positive and negative connotations (uncorrelated returns and high fees for example).

The universe of hedge funds and the strategies they employ are vast, but it’s important to remember why we hold them in the first place: to diversify our funds. Bearing this in mind, it is thought-provoking when you look at data over the past 20 years and find that many of these strategies are actually highly correlated to equity markets. Within the Close Managed Funds, we are already invested in managers exposed to both shares and bonds, so it is imperative that we focus our search on absolute return funds that deliver something different.

The value of research

Finding these funds is not easy – we met with 125 alternatives managers in 2019 and found just a handful that we considered adding to the Close Managed Funds. These strategies require specialist knowledge and we must be able to challenge the managers to differentiate between those that are skilful and those that are merely lucky.

Active finding its form

We began this piece by asking ourselves whether above average returns were available to clients who invest actively. We believe the answer is yes, and more so than ever during periods of heightened volatility, in which the very best active managers can move quickly to identify opportunities and manage risk. We trust that you and your clients will take comfort knowing that we continue to search for exceptional managers in a sea of ‘average’, uncovering new and interesting investment opportunities within the funds.

*FE Trustnet as at 31 March 2020.

Important informationThis article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice.