This article is part of the Morningstar's Guide to Active vs Passive Investing. Click here for our edit on how the experts use the tools at their fingertips, finding out whether you prefer one to the other and examining how to blend active and passive investing for profit.
Emma Wall: Hello and welcome to the Morningstar series, 'Ask the Expert.' I'm Emma Wall and here with me today is Morningstar's Dan Kemp.
Hello Dan.
Dan Kemp: Hello Emma.
Wall: So, we're running an active and passive investing week, looking at the different criteria and the different positives of the two styles of investing. Passive investing is fantastic in certain areas but there are some fund managers who really do earn their keep, don't they? They earn that fee. I though you could perhaps highlight three for us today.
Kemp: I'd love to do that and you are absolutely right that in many areas of the capital market it's very difficult for managers to add value and so it's not just the quality of the manager but where the investor is placing their money to determines whether they should be doing passive or active.
So, I've picked three funds from different parts of the capital two of which are classic areas where active managers can normally add value and then also one where it's a little bit more difficult.
So, the first one I was going to talk about is in the U.K. equity space and the fund we picked there is the Old Mutual UK Alpha Fund. It will be well-known to many investors. It's not a secret. It's not a hidden gem, but it's run by a chap called Richard Buxton, who is a fantastic investor, been doing it for a very long time, and we've been in constant contact with him, both at Old Mutual and at his previous firm, Schroders.
Wall: And he has a fantastic track record, as you mentioned. He actually started this fund at Schroders, didn't he? So, he is really playing to his strengths. He designed a fund which showcased everything he is good at.
Kemp: This is exactly right. This is his fund, his DNA is in this product and it's ideally suited to his management style and he has transferred that fund effectively from Schroders into Old Mutual, but keeping everything else the same.
Wall: And what's the second fund today?
Kemp: So, the second fund is the Lazard Emerging Markets Fund. Again, emerging markets is a great place for an active manager to add value. It's so diverse, there is so much going on, both at the country level, the industry level and the individual stock level. So, it's quite easy for managers to outperform in that market. But nevertheless, you still need to pick a good manager and I think we've got a great one there with James Donald.
Wall: And the fund you mentioned before, UK and it's quite an efficient market, it's quite unusual to find someone who really does earn their fee. But as you say, emerging markets, it's such a broad scope that actually finding someone who would do not just the stock selection, the sector selection, the region selection, can really be value adding?
Kemp: That's right and that's really the key with a good emerging markets portfolio. It should be looking at the market on every level and not just at the stock level because as we know, political considerations can have a huge impact on returns and that's really where Lazard comes in.
Wall: And that's the third fund today?
Kemp: The third fund is an area where it's much more difficult to add value and that's in the U.K. corporate bond market. Now, returns in corporate bonds are normally lower than equities and driven by what happens in the government bond market, much more difficult to add value.
And so, there we've gone for the Royal London Corporate Bond Fund and that's a fund that tries to look at the market differently. It holds what they call high-profile bonds but also lower-profile which investors wouldn't normally access.
Wall: And they’ve just called it sticky areas in it because we've had a long period of a bull market in bonds with yields coming down and now we're entering a period where yields are expected to rise, which means price is going to go down.
Kemp: That's right. We are concerned about a bond market as we look forward and that's why again we'd be thinking about active managers in that market who are able to better gauge the outlook but also the current circumstance of the actual credits they invest in.
Wall: Dan, thank you very much.
Kemp: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
