Most years the FTSE All Share experiences a sharp correction. This creates a buying opportunity and shakes out any price distortion. According to the multi-asset team at BMO Global Asset Management there has been at 10% drawdown in the market every year for the past decade – but that has happened since January last year.
This suggests to the team that one is on its way; high valuations plus ultra low volatility equals a downturn.
For Rob Burdett, who runs the F&C multi-manager funds at BMO GAM alongside Gary Potter, the answer to investing in a market which may soon falter is to sell out of passive funds.
“Passive funds are bought on past returns, while active funds are bought on future hope,” he says. “Passive funds do not consider the profit and loss of their holdings, nor the management’s approach to dividends. We are vehicle agnostic; we have allocated as much as 40% of our Lifestyle funds into passive funds in the past. But we have sold this down to 20% now. There is more money flowing into passive funds than active funds at the moment and we think the timing is wrong.”
Burdett says there are certain asset classes in particular which do not lend themselves to passive investing; property, smaller companies, bonds and infrastructure.
“The bond market has seen big passive flows, which is fine when you have quantitative easing – Central Banks are propping up the market,” he explained. “Passive funds give the biggest allocation to the most indebted businesses, and at the moment low interest rates mean low default rates. But when that turns and rates rise the weighting towards the heavily indebted will be problematic.”
According to M&G statistics the sector where active managers most consistently beat the index over the past 20 years is UK equity income, followed by European equities. The most difficult sector for active funds to outperform is North America equities.
Price Does Matter But Performance More So
Multi-manager funds often get a bad rap for having high fees – the double layer of costs associated with first the underlying funds’ expenses and then the multi-manager fee. Morningstar analyst Randal Goldsmith explains that for this reason, no multi-manager funds are awarded a Gold Rating.
“We find that multi-manager funds have higher ongoing charges and therefore don't score so highly on our rating system,” said Goldsmith.
“It's really quite rare that we find a multi-manager fund that consistently generates enough added value to outweigh those costs and working from a repeatable process for us to develop high conviction.”
But the F&C team disputes this view – and the idea that only passive funds deliver true value to investors.
Tracking the MSCI World Index over the past 15 years it has returned 185%. Add a 1% fee – the fee of a passive fund, plus platform fees – and that return slumps to 145%. Minus 2%, should you be using a financial adviser, and this return diminishes to 110%.
The average Investment Association Global sector fund minus fees returned 145 over that term, while the BMO GAM team returned 205% - even after chunky, pre-regulation fees of 2.5%. This performance tracks the team from their days at Thames River Capital, through F&C to the fund at BMO GAM today.
“We understand that advisers have risk to take on, they deal with the client relationship, but many seem to think the answer to maximising returns to investors is going passive. Our research shows this is not true,” said Burdett.
