Late-cycle investing must be active: Man GLG

Late-cycle investing must be active: Man GLG

One quarter of global assets are now sitting in passive strategies, but there are structural and cyclical reasons for a shift back to active management, says Man Investments.


Speaking to investors, Man GLG portfolio manager Ben Funnell said there has been a "seismic" shift from active to passive management in the last decade.

"Passive equity now represents over 25 per cent of global assets, up from just 10 per cent a decade ago, and this growth appears to have momentum," Mr Funnell said.

However, he believes that while there are sound structural reasons for limiting one's active equity exposure, investors should be moving towards active strategies for three main reasons.

First, fund alpha (the component of returns that comes from active management, as opposed to index 'beta') is more important later in a market cycle when markets have risen and returns to equity are thin, he said.

"Beta expectations are lower, meaning that alpha’s contribution can be substantial on a relative basis," Mr Funnell said.

This is in contrast to the four years leading up to 2012, where alpha delivered just one eighth of performance, he said.

"One hopes that a capable manager should add two or three per cent to today’s expected return on equity of around five per cent – this equates to around a third of your annual expected return," Mr Funnell said.<

"This alpha is going to be vital for many institutional investors with real growth hurdles or those with obligations to distribute. Active management may now be worth the risk."

Second, the opportunity set for stock-pickers is increasing, which is part of a structural trend.

"Prior to the financial crisis, around 60 per cent of return was stock specific, and that fell to around 30 per cent post crisis. But in the last two years this number has been increasing to nearer 40 per cent, he said.

Finally, so-called 'smart beta' (indexing strategies that rely on factors other than market capitalisation) may not be as smart as investors like to think, Mr Funnell said.

"The more that assets are passively managed, the more opportunities exist for active managers to simply lean against factor exposures to outperform," he said.

"A criticism of smart beta is that the strategies are price momentum biased, and take no account of valuation.

"In summary, we believe that there are structural and cyclical reasons for reconsidering active managers. The risk premium is low; the bond yield is low; and so market beta is low.

"Furthermore, as the financial crisis recedes in the collective memory we believe that the alpha opportunity is growing. The balance between active and passive management certainly seems to be shifting in favour of the active," Mr Funnell said.

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Late-cycle investing must be active: Man GLG
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