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IN YOUR INTEREST
rising, investors may not be too upset with
that – although active fund managers may be
performing better.When markets are falling,
however, tracker funds are exposed; while
a skilled active manager may still be nding
opportunities to make pro ts or to protect
investors from the full e ect of the drop.
Richard Rooney, of BurgundyAsset
Management, points out that indices can
be very poor quality: the one in his native
Canada, for example, is particularly prone to
bubbles and cycles.
‘We have a global mandate for St. James’s
Place that is measured against the global
index.There are a lot of high-quality
companies in the index, but there are a lot of
low-quality companies, too. In theory, if there
are companies in an index of poor quality and
with poor management, you could do better
with an active investment strategy.’
An active approach can also avoid the risk of
a portfolio being excessively skewed towards
a small number of sectors or companies.The
current FTSE 100 is dominated by banks, oil
and gas, and pharmaceutical companies, which
together account for around a third of the
index. It is also an international index, with
global companies such as BP, Unilever and
GlaxoSmithKline making a large proportion
of their revenues overseas.A passive fund
tracking the FTSE 100 will inevitably be
heavily exposed to these sectors; an active
fund manager will take their own view on the
prospects of these companies and sectors and
construct their portfolio accordingly.
Active investors can take a long-term view,
holding on to shares that fall out of favour in
the expectation that they will recover. Rooney
believes that a patient approach is one of the
important factors in generating long-term
returns.‘You have to accept that there will
be periods of under-performance. But, if you
have clients who know your style and process,
and if you concentrate on continuing to do
what you have always done, investors should
be rewarded for their patience.’
Tracker funds, by contrast, have to sell
shares when they fall out of the index – and
have to keep adding to their holdings if the
shares rise; and so the company becomes a
bigger proportion of the fund, regardless of
whether that rise is justi ed or overdone. Not
all indexed products pay dividends, which
are a vital part of total investment returns:
indeed, the FTSE 100 may only have marked
time in share price terms between December
1999 and February 2015, but if dividends are
included, the return was 66.3%. Investors in
a tracker fund without dividends risk missing
out on that crucial part of returns.
Of course, not all indexed products
track the FTSE 100: there are also products
tracking the FTSEAll-Share, regional and
sector trackers, and a growing range of
specialist trackers following more esoteric
indices or niche areas. Some of the more
specialist tracking products can have a place
in an investor’s armoury – for example, to
provide exposure to geographies where
there are few active managers – as a risk
management tool or as part of a diversi ed
global portfolio.
But investors should be wary of being
taken in by the apparent simplicity and cost
advantages of a purely indexed approach.
Indexation can actually be higher risk than
active management – as the technology boom
demonstrated.Taking a contrary view can
mean there are periods when performance
lags but, over the long term, a skilled active
manager should produce returns ahead of
the index.As the legendary investor Sir
JohnTempleton said:‘It is impossible to
produce superior performance unless you do
something di erent from the majority.’
Balance sheet
While it has taken 15 years for the
FTSE 100 to close above its 1999 peak, many active
fund managers have used their skill to make good,
positive returns over this time.
Skilled active fund
managers can avoid
buying shares at
inflated prices
THE INVESTOR
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