Please see the below content from Blackfinch Asset Management:
The role of an active manager is to make investment decisions based on analytical research, forecasts, judgement and experience with the aim of outperforming a specific benchmark or achieving a target return. This is as opposed to passive management, which involves tracking a market index.
The optimal environment in which active fund managers should thrive is when there are heightened levels of stock market volatility. Large swings in market direction create attractive investment opportunities as well as compelling exit points for profit taking. Arguably, markets have rarely been more volatile than in 2020. As a result, we’ve been extremely vigilant in assessing and monitoring the actively managed funds to which we allocate within our portfolios.
Our Approach to Active and Passive Managers
We’re whole-of-market investment managers, meaning we have the luxury of being able to make investment decisions freely, without fear of compromise. We’re unbiased in our investment selection. This extends not only across underlying fund houses, geographic regions and asset classes, but also when it comes to selecting between active and passive mandates.
We blend active and passive strategies within our portfolios, recognising the benefits that both approaches bring. When selecting an actively managed fund, we expect to clearly see value being added over and above an equivalent passively managed fund.
It’s important to establish whether a fund is delivering outperformance versus its selected benchmark. We’re also just as concerned about how it’s performing against its comparable peer group. This helps us to ensure that our investment screening process enables us to identify active managers with the ability to deliver attractive risk-adjusted returns versus other similar mandates.
Active Equity Managers
Equities are the main driver of performance in most portfolios. Our most recent assessment showed that, out of all actively managed equity funds to which we allocate, 84.6% have outperformed their respective benchmarks this calendar year. Perhaps even more comforting is that when compared to their peer groups, an impressive 92.3% of our underlying funds have outperformed their peer groups.
North America
Notably, within the North American equity sector, one of our core active equity funds has delivered a year-to-date return of 84.5%. This is some 71% ahead of the base market and equivalent passive mandate.
Asia and Emerging Markets
China, emerging markets and Japan have also been areas where our active managers displayed strong returns over equivalent passive and sector comparators. Of course, past performance should not be used as a guide for future returns. These impressive returns do mask some periods of significant volatility. However, when used at the correct weight and managed appropriately, these funds can be a fantastic component in a portfolio.
UK
On the flip side, within our UK equity allocation the margin of outperformance from active managers was far less, particularly in the large cap space. While outperformance was achieved, the difference between active managers and their passive equivalents was around just 2-3% after fees. We feel this performance differential is down to the notable challenges that the UK market has faced this year above and beyond the pandemic. For this reason, we remain comfortable in maintaining our current underweight to the region.
Ongoing Assessment and Monitoring
As ever, we’re conscious that the investment backdrop can change at a moment’s notice and we remain vigilant in our allocation to active managers. This is reflected in how we stick to our established process and also highlights the importance of regularly screening and assessing both active and passive mandates. This discipline helps us to ensure we don’t become wedded to ‘star’ managers and continually focuses attention on selecting the correct strategy depending on the particular stage of the market cycle.
As you may have seen with some of our other blog content, we regularly share updates from Blackfinch Asset Management as we believe they are a very good investment management firm. They have a good solid ESG proposition built in to their investments and as you can see in this article, they have a very good approach to investments and are varied in their methods to help deliver the right returns depending on the clients circumstances.
As Blackfinch note in the article, they are conscious that the investment backdrop can change at a moment’s notice and remain vigilant in their allocation to active managers.
We share the same view, and one of the ways we remain vigilant is by staying up to date on markets by taking in a wide range of views from across markets to help us get a handle on what’s going on.
We are also vigilant with the investments that we recommend to our clients and review these on an ongoing basis to ensure that they are doing exactly what they say they will and looking after clients assets in the right way. This is part of our ongoing research and Due Diligence.
Please keep an eye out for further updates from both us and from a range of different fund managers and investments houses.
Andrew Lloyd
19/11/2020