What did you make on your investments in 2015? Chances are if you had exposure to the major markets 2015 was not among your most profitable years. Unless of course, you were savvy enough to have picked an actively managed fund that avoided the pitfalls – energy stocks and banks in the UK – and ratcheted up your exposure to those equities which bucked the general trend.
A rising tide lifts all boats; the multi-year stock market rally in the US and UK following the financial crisis meant that almost everybody who had skin in the game, whether it was an ETF tracking the FTSE 100 or an actively managed fund selecting domestic stocks thematically, almost everyone made a profit.
Flat Market Syndrome
But then the bull ran out of steam. The FTSE 100 returned next to nothing in 2014 and 2015; thanks predominantly to oil prices halving and then halving again. Oil and gas stocks, and companies those related with mining make up such a significant part of the blue chip UK stock index. Banking stocks also struggled, battered by never-ending fines, and supermarket stocks saw their prices fall as the discount stores stole market share.
Traditional market-cap weighted ETFs and tracker funds saw their performance stall along with the market, but good active fund managers have seized the chance to pull away. The market slowing should be a catalyst for investors who have previously favoured passive strategies to consider active management once more, says Gary Potter, co-head of the multi-manager team at F&C Investments.
“If you think passives are the only solution, you need to rethink your approach,” he said. “Last year the FTSE All Share made just 0.8%. Luke Kerr, manager of the Old Mutual UK Dynamic Equity fund made 23%. Price is what you pay, value is what you get.”
Potter, along with his co-manager Rob Burdett, is not anti-passive fund management. The managers have used passive strategies across their two fund ranges, contributing positively to the growth of assets under management which have now reached £2.7 billion. However, he said that at this point in the market cycle investors would be foolish not to be selective about the parts of the index they held in their portfolios.
“Manager selection drives returns,” said Potter. “It is about choosing the right active managers at the right time – before they have made great gains themselves. But as markets become more highly correlated active management is the only way you’re going to make a positive return.”
More Than Stock Selection to Boost Returns
For the past four years the FTSE 250 index of mid-sized companies has outperformed the FTSE 100. As well as the lack of failing mining and bank stocks, this is because the companies that make up the FTSE 250 are more domestically focused, and the UK economy has been growing. The FTSE 100 is reliant on the rest of the world for 70% of its revenues – and emerging market struggles have impacted the bottom line of companies such as Standard Chartered (STAN) directly.
However, this bull run cannot be expected to last forever. The threat of an EU referendum on the horizon will begin to wobble even these sturdy growth stocks.
Stephanie Flanders, chief market strategist for JP Morgan said that with so many geopolitical risks abounding in 2016, the only way to make real money is to use derivatives.
“In times of growth, bonds and equities show a negative correlation, and provide an investor with good diversification,” she said. “But in times of stress – such as the Chinese stock market crash last August – everything comes down globally, across all asset classes. The only things that didn’t plunge then, and indeed in the first 10 days of this year, were hedge funds and more complex multi-asset funds which use derivatives. In a volatile market with flat returns such as this, we need more tools to make positive returns that simple asset diversification.”
