Managers need to be truly active and communicate better with clients, according to GAM’s Adrian Gosden, who said the rise of passives has meant the active management industry needs to regain investors’ trust. 
In an interview with FE Trustnet he also claimed his newly launched GAM UK Equity Income should be able to outperform his former Artemis Income fund thanks to its focus on smaller companies and the renewed energy he has in his latest product offering.
The fund is currently located in the IA Unclassified sector, but Gosden said he hopes it will be moved to the IA UK Equity Income sector as soon as possible.
“I have done equity income for 20-odd years,” he explained. “I believe in it wholeheartedly and would like to adhere to all those rules.
“I have never been thrown out of the sector so providing a yield greater than the market is something I believe in and holding at least 80 per cent in UK equities is also something I believe in.
He said this is because it is more important than ever for fund managers to communicate their offerings to clients more clearly.
“I think when you go to market in this day and age, it is important to provide a box into which can assign you to because they are making these decisions for their clients and it has to be accurate,” he said. “So, this idea that you can be everything or nothing, I don’t think [it] is viable.”
The manager said that of greatest importance to investors is that a fund operates as you would expect it to. For example, an equity income should be able to pay dividends, leading to generally lower volatility in down markets.
Gosden added that equity income funds should also, at the very least, yield more than the market otherwise they could be seen as being “a bit disingenuous”.
“There are some funds called income funds that don’t yield more and that’s for them to deal with. I think it is so important for our industry and our clients that everything is straight, clean, easily observed and all of this sort of stuff,” he said.
“We need to rebuild trust with clients. Fund management has done a reasonable job and is making changes but let’s keep it going and make it even clearer.”
Gosden, who outlined which sectors he will and won’t be investing in earlier this month, said he will be running a similar process to the one he employed in the £6.4bn Artemis Income fund.
His process will focus on the cashflow that companies generate, understanding the industries that they sit in, interviewing the management to understand the use of that cashflow and then deciding whether it makes it into the portfolio based on its valuation or liquidity, he explained.
This process saw the manager, alongside Adrian Frost and latterly Nick Shenton, return 218.23 per cent during his tenure from 2003 to 2016.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
However, Gosden said there are two factors that should allow his new GAM UK Equity Income fund to outperform, the first being its size.
As highlighted in an article earlier this month, smaller funds have the potential for higher outperformance as they can make investments lower down the market capitalisation – something Gosden is taking full advantage of.
“This fund is right across the market cap scale – so the smallest holding is £100m is the largest is around £100bn,” he said.
“And if you were to look at how the assets are split, around half the assets [by weighting] are in companies above £3bn market cap, which means the FTSE 100, and half are in the mid- and small-cap space.”
This is different from the much larger Artemis Income fund, which due to its size has a 77 per cent weighting to large-cap stocks.
“You have a measure called active share and that determines how different you are from the index. Clearly if you are owning all the big holdings your ability to outperform is reduced,” the manager noted.
This does not necessarily mean that large funds cannot outperform, with his former fund second quartile performer over three and five years, and a top quartile performer over 10 years.
“You can see some of the big funds are good performers over reasonable periods of time because they are picking individual stocks. But the point is, if you believe in your skill base why not open yourself up to a wider number of shares. Why not go into small and mid?,” he said.
However, he said a high active share, regardless of a fund’s size, is crucial for active managers trying to charge higher fees.
“I think you have to have high active share to justify fees. People are doing passive investments for next to nothing so if you are trying to come to market as active, and are charging people the fees, you need to be truly active otherwise you are going to look pretty stupid,” Gosden noted.
The other reason he is confident of outperformance is a new lease of life since moving to GAM.
“When you launch something new, the energy is almost impossible to describe. It goes through the roof. We are going to the market with 50 brand new holdings, no history, no mistakes and therefore no excuses. We are putting it all out there,” he said.
“If you have been doing it a while and your fund is well-established, in the top quartile etc. it is just not the same I can promise you.”
Finally, the manager said the current environment was an interesting one to launch his new fund with ongoing market uncertainty over Brexit causing dispersions in the market – a topic discussed by FE Alpha Managers Neil Woodford and Mark Barnett earlier this week.
Performance of indices since EU referendum
Source: FE Analytics
“Uncertainty is pretty unhelpful for clients, but it is not unhelpful for fund managers. Uncertainty produces all sorts of opportunities to a fund manager – particularly an equity income manager like me, as inherent in my genetics is a value bias and a want to be slightly contrarian to find my income,” he noted.
“With all the problems that Brexit is causing – i.e. uncertainty – you have some shares doing very well and some doing badly.
“On that basis I think there is a lot of opportunity in the market because it is very strong for companies that have international earnings, and in consumer staples but it has been pretty poor in some of the financial areas and industrial areas.”
This, he said, allows him to position the entire portfolio accordingly, rather than gradually tweaking an existing portfolio to reflect his views on the market.
However, he said the stock market hitting record new highs was not very helpful for a new fund. With valuations seeming toppy, Gosden noted that it was hard to convince nervous investors to allocate capital compared with rising markets, making it all the more important to communicate well, outperform early and remain truly active.