ActiveJul 29 2021

Investors place more trust in active management

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Investors place more trust in active management

Investors have more confidence in active portfolio management than passives when it comes to achieving their objectives, according to research from Quilter Investors.

The firm found 54 per cent of investors would prefer knowing their portfolio was run by a team of professionals, compared with 8 per cent who said they felt comfortable letting a computer run their money.

This was true even when considering costs, with passive investing tending to be cheaper than its active counterpart.

The research was conducted between May 27 and June 1 and surveyed 1,041 people with a minimum of £60,000 in investable assets.

Danny Knight, head of investment directors at Quilter Investors, said given the active versus passive debate has been raging for years it was interesting to see investors had considerably more confidence in active management.

“We are at a point in markets where we feel active management should thrive. Inflation and interest rate concerns are hampering bond yields, while we appear to be undergoing somewhat of a rotation in performance drivers for markets. 

“As a result, actively managed portfolios have a great opportunity to add real value to clients by offering flexibility and being able to capture style changes as they happen," he said.

But he added passives still had a place within portfolios.

“There are a number of passive solutions that will give investors exposure to markets where the probability of an active manager outperforming is low, or where there are shorter term tactical opportunities."

Ben Yearsley, investment consultant at Fairview Investing, said: "I have been saying for a while that it could be a good period for active as investors require more differentiation now.

"It's also cyclical. We have had a long period of the mega caps (especially in the US) dominating and prices have simply got too high on many areas leaving investors to look elsewhere."

He added there is also the ESG angle to consider. "I don't think passive has addressed this well yet and that's another positive story for active."

He explained: "Passive and trackers aren't dealing with ESG considerations well - you can't really when mimicking an index whereas active funds are embedding ESG considerations into their processes."

Active vs passive

The active versus passive debate has increasingly swung in active investment management's favour in recent months.

For much of the past decade, between the end of the financial crisis and start of the pandemic, both bond and equity markets generally rose in value from the lows of the immediate crisis period, and passives performed strongly.

But James Burns, co-head of the managed portfolio service at Smith and Williamson, told FTAdviser in May that with markets now looking expensive and having swiftly recovered from the immediate lows of the pandemic period, and with considerable uncertainty about the direction of economies and inflation "it will be hard for passive funds to outperform against the best active funds, which can be flexible and the opportunities that arise in the years to come.”

What's more, head of the Alliance Trust Investment Committee, Craig Baker, suggested the risk of legacy sustainability issues in publicly listed firms could even make actives less risky, as managers would pick up those risks.

In January, data collected by Quilter showed active equity managers were outperforming indices in the majority of major equity sectors during 2020.

The data showed the managers outperformed market indices in seven of the 10 major Investment Association sectors, struggling predominantly in income-oriented portfolios.

Active managers performed best in the UK Smaller Companies sector, outperforming the index by 11 per cent, while the average UK All Companies fund was nearly 4 per cent ahead of the index.

The trend was also found in overseas funds. Those invested in global, continental Europe, Japan and emerging market equities were at least 1.6 per cent ahead of the index and returning up to 5 per cent more.

Other findings

Today's findings also showed that three quarters (74 per cent) of those surveyed said spreading savings across a range of asset classes was fairly or very important to them.

A further four in ten (41 per cent) said knowing their investments were well diversified would give them the most peace of mind.

This is compared to 8 per cent who said backing a few leading companies was important and 5 per cent who believed in the power of investing in one leading sector.

Knight said it was encouraging that investors remained convinced about the benefits of diversification.

“The phenomenal run by the tech giants will have caused many to feel they have missed out on big gains, but as returns in recent months have shown, things can change incredibly quickly.

“Diversification has proven to be of huge benefit to clients not just from a return and risk perspective but also the journey they go on to get there. For a lot of retail investors, it is often about the ride as much as it is the destination.”

Finally, many of those surveyed were unconvinced by the “myth” of the “star manager”, with 9 per cent saying the potential of a chosen fund manager becoming a star would give them the confidence required.

sally.hickey@ft.com