Investors face a post-quantitative easing world, shrinking central bank balance sheets, volatile markets and now fears of a global recession, but one veteran multi-manager says there is no better time than today to back active funds.
Recent years have seen vast sums of money pour into index trackers as investors embrace low-cost funds and grow sceptical over the value offered by active management.
As the chart below shows, the proportion of assets under management (AUM) in the UK has surged from 6 per cent in 2009 to 15.8 per cent by the end of 2018. Within the Investment Association universe, some £182bn is now held in tracker funds.
Investment Association AUM in tracker funds
Source: Investment Association
Over the same decade, equity markets have been pushed higher by ultra-loose monetary in the form of huge quantitative easing programmes and interest rates at historic lows.
The FTSE All Share has made a 186.78 per cent total return over the past 10 years, while the S&P 500 has made 351.02 per cent (in sterling terms) and the MSCI World has risen by 251.02 per cent. Even the MSCI Emerging Markets index, which has significantly underperformed the developed world, is up 145.25 per cent.
While passive investors have ridden the market higher and in some cases won a better outcome than those investing in active funds, Algy Smith-Maxwell, a manager in the Jupiter Independent Funds Team, which is responsible for managing the fund-of-funds Jupiter Merlin Portfolios, believes now is the time to back active managers.
“At a time when markets have been climbing a wall of worry for over 10 years now, I think there is no better time to be investing in truly active managers than today,” he said.
The easy money policies of central banks were the rising tides that helped to lift asset prices across the board, often to the benefit of passive investors. However, the multiple sell-offs of 2018 showed how fragile markets are to any tightening of monetary policy.
Added to this is the question of how much further assets can rise across the board given their already lofty valuations and slowing supply of stimulus from central banks. Smith-Maxwell argued the right active manager can be well-placed to navigate this.
But it is important to find genuinely active managers. Looking at the Jupiter Merlin Portfolios, the multi-manager noted that the average fund owned by his team has an active share of 84 per cent, a stock holding period of more than four years and influence change by voting at company meetings.
“One thing that is increasing important in today’s world is that active managers are active stewards of your clients’ capital,” Smith-Maxwell said. “They are not churn-and-burn managers.
“One of the most important things to highlight is just how active these managers are. These are not ‘benchmark plus or minus one per cent’ managers, these are truly active manager picking portfolios of stocks which can be very far removed from the underlying benchmark indices.”
Performance of indices over 10yrs
Source: FE Analytics
The asset allocation of the Jupiter Merlin range – which includes Jupiter Merlin Balanced Portfolio, Jupiter Merlin Growth Portfolio and Jupiter Merlin Income Portfolio – demonstrates this strong preference for active managers.
Within equities, the Merlin team has a bias towards value, quality and income-orientated funds. Examples of equity funds within the portfolios include Jupiter Global Value Equity, Fundsmith Equity and M&G Global Dividend.
“There is value to be found across global equity markets but you have got to use the right managers to do. We can pick up portfolios at the moment on P/Es [price-to-earnings multiples] of less than 10x with single-digit earnings growth, often supported by quite healthy dividend yields,” Smith-Maxwell said.
“Equity markets at a headline level have travelled a very long way and we know that earnings have got to come through for those earnings to be justified. But underneath the bonnet there are stock-by-stock opportunities that are really interesting.”
Turning to fixed income funds and the Jupiter Merlin team has a preference for active managers that have a flexible mandate to explore whichever opportunities they see fit.
The portfolios hold a number of strategic bond funds, such as Jupiter Strategic Bond, TwentyFour Dynamic Bond and Hermes Multi Strategy Credit.
“It’s hard to find value in fixed interest. We don’t think we’re clever enough to be picking the best emerging markets fund or the best high yield bond fund at the moment,” Smith-Maxwell explained. “We think the strategic bond fund managers we’re exposed to are doing it the way which is going to be most beneficial to investors.”
The Jupiter Merlin team also sees opportunities for active managers in the alternatives space. While the Merlin funds take their gold exposure through a passive vehicle, the portfolios own several absolute return funds.
“Absolute return funds have always been a favourite asset class for us, where you get the true alpha generation from the manager,” Smith-Maxwell said. “But we don’t invest in anything more complicated than long/short equities, because that is our area of expertise.”
Funds owned in the portfolios include Polar Capital UK Absolute Equity, Merian Global Equity Absolute Return and LF Odey Absolute Return.
When the right active manager has been found, the Merlin team is not shy of allocating significant amounts to them.
Smith-Maxwell noted that “two managers make up a pretty chunky proportion of the Merlin funds under management”, with Anthony Kingsley’s Findlay Park American fund and Hugh Yarrow’s TB Evenlode Income fund accounting for more than 24 per cent of the combined assets in the Merlin portfolios.
Performance of Jupiter Merlin Portfolios over 10yrs
Source: FE Analytics
Both funds have delivered some of their respective sector’s highest returns since launch. However, both are “pretty much closed to new investors,” which highlights the popularity of genuinely active, outperforming managers.
There’s no lack of media reports claiming that many, if not most, active managers do not create value for their investors. However, recent academic studies have challenged this widespread perception.
In a review of the past 20 years of academic literature (which considers the findings of more than 200 research papers) on actively managed funds, professor Martijn Cremers of the University of Notre Dame and colleagues said: “Active managers have a variety of skills and tend to make value-added decisions, such that, after accounting for all costs, many actively managed funds appear to generate positive value for investors.”
While acknowledging that the debate between active and passive is not settled, the researchers concluded that “the current academic literature finds active management more promising for investors than the conventional wisdom claims”.
Notably, the study found that funds with a high active share did not underperform after fees.