The most important decision investors can make in 2018 is to go active, according to Janus Henderson. Passive strategies are likely to struggle in a higher volatility environment, the fund manager predicts.
Volatility returned with a vengeance in February. The FTSE 100 has already seen nine movements of more than 1% in the first two and a half months of 2018 compared to 17 in the whole of 2017. We’ve also had the first movement of more than 2% since last April.
With significant geo-political risks including Brexit, the Trump administration and instability in North Korea, rising interest rates around the world, and a tightening of monetary policy, it looks as though that volatility’s here to stay.
While equity markets may continue to march ahead, it will be with much less serene progress than before. “In that environment, what do you want? You want an active manager,” says Andrew Formica, co-chief executive of Janus Henderson.
“You want someone who is sitting there day in, day out, thinking about those issues and adjusting the balance of the portfolio on your behalf as that new information comes in, as market prices adjust.
“If you just blindly follow an index, you could wake up and find yourself down significantly and not having had any chance to mitigate it.”
Similar concerns are expressed by Scott Spencer, investment manager on BMO GAM’s multi-manager range of funds. Back in January he said those aforementioned factors meant his team “really wants to be buying active managers”.
“Nine years of a bull market is a great time to be taking profits out of passives and buying more active managers,” says Spencer. As a result, the team’s passive exposure has come down from a peak of 45% to around 20% now.
Benchmark Bubble?
Another worry the BMO GAM team has is over “the sheer number of benchmarks out there” and the amount of money that is invested in them.
Spencer cites research from Strategas that shows there are now more benchmarks in the US than there are stocks. “Perhaps there’s a bubble in benchmarks,” he muses.
Formica admits the industry as a whole has not been “making a compelling enough argument for active management”. He says the focus on the cost of investment management above all else is unhelpful.
“If you’re going to focus on cost, then passive is always going to be better,” he explains. “Passive has a role to play in a portfolio, but it’s a role; it’s not your portfolio. And active management has a role to play and it’s a strong role.
“If you’re going to look at value, after fees – and we have to justify our fees, absolutely – it’s the value we contribute, and that value is through cycles.
“But you’ve got to actually judge us on the return profile over an extended period – not a quarterly basis, not monthly returns, but actually over three, five, seven-year terms.”
Formica says the SPDR S&P 500 Index (SPY), the world's largest ETF, has an average holding period of nine days. “That’s not investment. People who are buying that and say they are investing in the US; they’re not investing, they’re trading.”
Another area where he thinks passive funds fall short is on holding companies to account. While he admits passive fund managers can engage with management, “you’re going to own those shares one way or another”.
“It’s the people who really will buy or sell based on the changes that have been made that are the true purveyors of governance and I think that’s a really important message.”
