“We like passive funds, we are truly agnostic when it comes to active versus passive,” says Rob Burdett, co-head of the multi-manager team at F&C, part of BMO Asset Management.
“But we are concerned that some adviser-led investors are actually paying more for passive funds than they would an actively managed solution – and are subsequently underperforming the market.”
Instead, Burdett advocates a fund-of-funds approach – professional investors using actively managed funds to add alpha and beat the market. It is hardly surprising that an active fund manager is talking up his shop; the actively managed fund industry is under increasing pressure thanks to the significant market gains of 2016 and every decreasing passive fund fees.
But Burdett and his co-manager Gary Potter have the stats to back up their message; you’re better off buying a fund of funds directly from the provider than having an adviser manage a portfolio of passive funds on your behalf.
“For retail investors, passive funds make sense, they are the lowest cost solution. But investors who use an adviser can end up paying an extra 2% in portfolio management fees, platform fees and adviser costs. If you take a tracker and add these extra charges, returns look very different. What are you paying for? Passive funds seem transparent and low cost, but in the advised space, they actually are not.”
Over the past 15 years the MSCI AC World index has returned 152% to investors, while the average Investment Association Global actively-managed fund has returned 117%. With those two data points, active funds underperform passive funds. But add 2% in annual advised fees to that tracker and total returns drop to just 89%. The F&C multi-manager team has returned 170% over the same period, after fund charges.
Developed Markets are at an Inflection Point
Looking back at the annual outlook the F&C multi-manager team made in January 2016, portfolio manager Anthony Willis admits they failed to predict the extent of political change and the related further falls in bond yields.
“Even if we had correctly called the EU referendum and US election results, we would have got the market reaction wrong – those warning that a Brexit result would result in a market crash were wrong, and vice versa,” he said.
“Despite the high returns from equities, 2016 was a difficult year and we now believe we are at an inflection point for developed markets.”
Quantitative easing has proved a boost for risk assets such as equities and property, and with the money tap switched off these assets should suffer, Willis explained. Add to that the political sea-change towards populist, anti-globalisation and nationalist politics and it makes for a challenging backdrop.
“Trump is an unknown quantity,” said Willis. “The negative effect of his protectionist stance should not be underestimated. He is an influencer of markets. And this could continue in the upcoming elections in the Netherlands, France and Germany. This will have an impact on the UK too as trying to negotiate Brexit deals will not be a priority for those countries when they are facing political change of their own.”
Inflation is another challenge, boosted by unemployment at near-record lows in both the US and UK and wage inflation picking up in both countries. There is also the commodity rally of last year to consider – 12 months ago, the oil price was half what it is today, and that should start to come through on annual inflation figures soon
Despite these headwinds, Willis does not believe 2017 is the year we will see a stock market crash – instead he has pushed back this event to 2018.
“In Europe and emerging markets PMI data is robust, and the commodity rally has been good for Latin America and Russia. Trump’s policies are optimistic and while equities are not particularly cheap they are relatively attractive when compared to fixed income or commercial property,” he said.
Globally, the team like Japanese equities, but not the UK and Europe where they deem political risks as “too high”.
“We like passive funds, we are truly agnostic when it comes to active versus passive,” says Rob Burdett, co-head of the multi-manager team at F&C, part of BMO Asset Management.
“But we are concerned that some adviser-led investors are actually paying more for passive funds than they would an actively managed solution – and are subsequently underperforming the market.”
Instead, Burdett advocates a fund-of-funds approach – using actively managed funds to add alpha and beat the market. It is hardly surprising that an active fund manager is talking up his shop; the actively managed fund industry is under increasing pressure thanks to the significant market gains of 2016 and every decreasing passive fund fees.
But Burdett and his co-manager Gary Potter have the stats to back up their message.
“For retail investors, passive funds make sense, they are the lowest cost solution. But investors who use an adviser can end up paying an extra 2% in portfolio management fees, platform fees and adviser costs. If you take a tracker and add these extra charges, returns look very different. What are you paying for? Passive funds seem transparent and low cost, but in the advised space, they actually are not.”
Over the past 15 years the MSCI AC World index has returned 152% to investors, while the average Investment Association Global actively-managed fund has returned 117%. With those two data points, active funds underperform passive funds. But add 2% in annual advised fees to that tracker and total returns drop to just 89%. The F&C multi-manager team has returned 170% over the same period, after fund charges.
Developed Markets are at an Inflection Point
Looking back at the annual outlook the F&C multi-manager team made in January 2016, portfolio manager Anthony Willis admits they failed to predict the extent of political change and the related further falls in bond yields.
“Even if we had correctly called the EU referendum and US election results, we would have got the market reaction wrong – those warning that a Brexit result would result in a market crash were wrong, and vice versa,” he said.
“Despite the high returns from equities, 2016 was a difficult year and we now believe we are at an inflection point for developed markets.”
Quantitative easing has proved a boost for risk assets such as equities and property, and with the money tap switched off these assets should suffer, Willis explained. Add to that the political sea-change towards populist, anti-globalisation and nationalist politics and it makes for a challenging backdrop.
“Trump is an unknown quantity,” said Willis. “The negative effect of his protectionist stance should not be underestimated. He is an influencer of markets. And this could continue in the upcoming elections in the Netherlands, France and Germany. This will have an impact on the UK too as trying to negotiate Brexit deals will not be a priority for those countries when they are facing political change of their own.”
Inflation is another challenge, boosted by unemployment at near-record lows in both the US and UK and wage inflation picking up in both countries. There is also the commodity rally of last year to consider – 12 months ago, the oil price was half what it is today, and that should start to come through on annual inflation figures soon
Despite these headwinds, Willis does not believe 2017 is the year we will see a stock market crash – instead he has pushed back this event to 2018.
“In Europe and emerging markets PMI data is robust, and the commodity rally has been good for Latin America and Russia. Trump’s policies are optimistic and while equities are not particularly cheap they are relatively attractive when compared to fixed income or commercial property,” he said.
Globally, the team like Japanese equities, but not the UK and Europe where they deem political risks as “too high”.
