All this week we are running a Guide to Active and Passive Investing to help you, the investor, make smart choices for your portfolio.
Emma Wall: Hello and welcome to the Morningstar. I am Emma Wall and I am joined today by Mark Burgess, CIO of Columbia Threadneedle.
Hello, Mark.
Mark Burgess: Good morning.
Wall: So I know that you are a great advocate of active management. What can active management offer investors that passive simply can't?
Burgess: We only manage money actively. And I think at the starting point, we have to sort of think about what stock market is, which is where those that require capital meet those that have capital. And if those have capital provided are indifferent to the returns that they earn from their capital, then that starts to break down the economics that we understand. So, we think active management is critically important for a functioning economy.
Wall: Good for the economy, and good for investors?
Burgess: Absolutely. We generally focus on companies that are well managed, are good businesses and above average returns on capital employed and we'll generally win out in the industries that they work for. So, we generally put together a portfolio of shares that will over time outperform their benchmarks.
Wall: It's quite interesting times at the moment because I think people who have invested in passive funds can have been lulled into a full sense of security since the crisis. Because stock markets have seemingly only gone one way in developed markets, and that's been up. However, that's not a normal market; a market cycle goes down, it goes sideways and that's really where active management can come into its own?
Burgess: I think that's right. So clearly those that have invested in passive strategies have enjoyed the market run that we've seen, but as have active strategies as well. Certainly, we generally had a good performance time over the last four or five years. But as returns start to become more difficult to find, particularly with rising interest rates and the cycle starts to turn then I think absolutely, it's important to focus on companies that can win in that environment. And it will be about alpha generation rather than just enjoying the beta.
Wall: I think people level sometimes the claim at active management that obviously it's more expensive than passive management. What would you say to that?
Burgess: I think you are mistaking the point if you only focus on the cost. It's about what return you enjoy. And clearly we charge higher fees than passive funds do, but we generate high returns than passive funds do. And the net return has generally been higher than the passive return. Indeed over 10 years, 100% of our UK, European, Asia ex-Japan, US and Global equities funds have outperformed their benchmark, which is quite a statistic. The majority of these funds have generated higher after-fee returns than passive funds. So, it's not just about the cost, it's about what you get delivered for that cost.
Wall: Mark, thank you very much.
Burgess: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
