The value of active investment
Evangelos Assimakos, Investment Manager
The last seven years have perversely been a difficult time to be a discretionary fund manager (DFM). Following the 2008 financial crisis, the world’s major central banks stimulated the global economy by cutting rates to zero and printed money in the form of quantitative easing.
These policies were like a shot of adrenaline for stock markets and, with very few bumps in the road until recently, equity markets have moved inexorably higher, reaching record levels. Cheap money has rushed through all asset classes and, in the hunt for yield and higher returns, moved to ever riskier areas. In many cases, low-quality investments have risen faster than higher-quality ones.
How is such an environment difficult? If asset prices are rising, surely it’s easy to be an investment manager – what client wouldn’t be happy with positive returns? However, the challenge hasn’t been positive returns, but how to manage clients’ money properly in such an environment. With the benefit of hindsight, the most-profitable strategy would have been to go 'all in' to higher risk assets putting aside all thoughts of prudent management and diversification.
Although some DFMs may have been prepared to forget their training and judgement, most (including Rathbones) have stuck to managing portfolios with a longer-term viewpoint, conscious that they do not possess perfect foresight or impeccable timing. As a result, DFM-managed portfolios have tended to lag those that were invested in basic index-tracker funds, reinforcing the reservations that some have about paying for a DFM service.
It is important to understand that markets don’t go up in a straight line and never rally forever. Investors should not look back to 2009 and draw a line to the future, extrapolating past returns. Although short-term returns may be driven by market sentiment, over the longer term they are driven by valuation – the more you pay for shares in a company today, the less you will make when you eventually sell them.
Not only are market indices now substantially higher than they were in 2009, but this unprecedented period of cheap money is also coming to an end. Data going back decades suggest that at current valuation levels, expected index returns over the next seven to 10 years are significantly lower than those over the last seven years. If history is any guide to the future, we may face several years of lacklustre returns or a market correction that would bring valuations to more normal levels far more quickly. Either scenario strongly merits using an experienced investment professional to steer your portfolio.
Where expected index returns are low, Rathbones seeks to add value through careful stock selection. We have substantial capability in direct stocks research, drawing not only from our experienced in-house committee of 20 investment professionals and full-time analysts, but also from our funds business that has several managers with excellent track records.
We only select companies in which we have a strong conviction and keep a close watch on their management and operations. By avoiding the poorer constituents of an index, we can add substantial value to our clients' portfolios. As recent months have shown, some companies with exposure to China have warned about weaker revenues and been punished heavily by the market – by minimising exposure to such stocks, active managers can significantly outperform the index.
In conclusion, while it is understandable how some may question the value added by DFMs, we strongly believe that now is absolutely the wrong time to go down the route of passive or do-it-yourself portfolios. We do not claim to be the only DFM able to add value in this new, more nuanced investment environment, but we have confidence in our resources and the expertise of our investment team, and welcome the challenge of normal investment markets without the distortion caused by quantitative easing. After all, it’s what we’re trained for.