Speaking on a recent episode of the Relative Return podcast, chief executive officer and managing director (MD) at Magellan Financial Group, David George, said he agrees with Future Fund’s recent pivot towards active equity management.
Last month, after shifting its listed equities approach away from active managers six years ago, the Future Fund revealed it is rethinking its strategy amid what chief executive officer Raphael Arndt described as “some of the most profound changes in living memory”.
Dr Arndt, speaking at the Australian Financial Review’s Alpha Live Conference, revealed that changing economic and market conditions led the sovereign wealth fund to reconsider active equity management after previously pivoting away due to the influence of central bank policies on market dynamics.
Commenting on this announcement, Mr George, who spent 14 years at the sovereign wealth fund, said he was “inclined” to agree with his old colleagues.
“They [Future Fund] hired active managers like many investors do. They changed that strategy in the last five-plus years towards more quantitative styles. Whether that’s passive, or enhanced passive, or factor investing, it’s probably the right way to say it, and there were a few reasons for that partly because the conditions for active managers were a little bit more difficult in terms of finding value for money,” Mr George said.
“I think the news, or the more recent story is that there’s a recognition, and it’s something that I agree with, so I can talk to that in a second, but there’s a recognition that the conditions are different.”
Mr George weighed in on the potential resurgence of active management in the current complex macro environment, questioning whether structural inflation is driving fund managers towards adopting active strategies.
“For me, I would say it’s structural inflation, but I do think structural deflation is a lot less prevalent … There’s still technological advancement, there’s still some of those factors pushing in one direction that still do that. But in terms of the globalisation of the labour force and other reasons why, the factors of production can get cheaper by moving some production offshore, those types of factors, those should be slowing down and maybe reversing in terms of that globalisation type factor,” Mr George explained.
“I think once you start weighing them together, what you’re going to have is less structural deflation and perhaps more of a normal environment where you’ve got inflation sometimes, and there are some real potentially inflationary trends that are now in place. The world does have to decarbonise, and there’s a lot of investment that needs to go in that, but that’s not the only trend. So, you’ll see more normal cycles.
“You’ll see higher interest rates in general. So, you’ll need interest rates being hiked sometimes to manage the economy in the way that we probably haven’t really seen very much of since the mid-2000s or even really the ’90s. Sometimes rates will need to be cut because the economy is slowing down, and you’re getting normal cyclical-type recessions, and monetary policy is just back.”
Mr George highlighted that these conditions result in increased pressures and a variety of crosswinds for companies, which he believes the Future Fund has acknowledged and is actively responding to.
“Sometimes it will be financing costs because those interest rates are higher, but if the economy is slowing, and then the differentiation in terms of those impacts across industries and companies, there should be more winners and more losers, and you’ll have less of an easy environment where financing would not have been an issue for most companies. Whereas perhaps for some, it will be going forward,” said Mr George.
“So I think that’s perhaps being recognised, and I think that is where you’ll find the opportunity set for active managers that are digging deeper than average. Certainly, we think we do a good job at Magellan in terms of really understanding what companies we are looking at and how they’ll fare through that, what their pricing power is, their resilience to various issues, where their debt load is, and where their refinancing issues might arise someday down the road. So, I think that’s actually the practise that can come back into favour in an era where the rising tide or really, the easy money isn’t lifting all boats.”
Last month, speaking on Future Fund’s decision, Mr Arndt said economies are diverging, as a result of which active alpha-seeking strategies in its $65 billion listed equities program are becoming “increasingly attractive”.
The Future Fund grew by 3.4 per cent to $202.8 billion in assets during the March quarter, and had $17.9 billion in Australian equities, $34.5 billion in developed market equities, and $12.0 billion in emerging market equities.
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.