Does sharper image of actively managed funds stand up?

Good active managers have an opportunity to showcase their worth in falling markets. Or do they? When I suggested this on Twitter recently, the response was mixed, to say the least, as the pro-passive fund Twitterati got cross and begged to differ.

I've always had a problem with the blinkered adherence to using only index trackers, and I said as much - as best as I could with 140 characters at my disposal. 'Oh come on! As FTSE trackers impotently continue to get spanked. Room for both,' I replied, in frivolous mode.

The Twitterati howled. Active management was an expensive waste of time, went the main thrust of their argument. They raged: 'Trackers falling when market falls is not a failing; it's market risk. Returns not certain, costs r. Looking for a needle in a haystack. Best to just stick with the haystack.'


Index trackers have the cost argument on their side, they are easier to explain and manage, and we live in a silly world where some 90,000 funds in Europe are being sold by expensive, excessively confident salesmen.

It's just that I always see the passive versus active debate as less binary than the 'four legs good, two legs bad' line adopted by many.

The Vanguard LifeStrategy 100% equity fund forms a decent chunk of my Sipp, but I also see the additional returns some skilled managers have brought to the table - and my portfolio.

Last year was arguably a bad year for passives, because lots of the really big stocks (oil companies and miners) in our core indices suffered massive falls in their valuations.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: 'Passives invest most of your money in the shares and sectors with the highest valuations, so when there is a big turnaround in fortunes, they can be badly hit.

'Active funds, by contrast, can definitely protect you better from market falls than passives because of their ability to dodge collapsing sectors. However, not all funds will do this. Some will take a high-risk, high-octane approach, and of course some managers will get things wrong.'

So are the occasionally cultish advocates of passive funds right? There is logic on both sides. Active managers should - in theory - be able to use their skill and judgement to circumvent falls in the stock market.

They can, for example, choose not to invest in Glencore, Tesco or Rolls-Royce, or any other shares that have recently turned toxic, while tracker funds are compelled to slavishly follow the share prices of such companies lower.

Big poobah fund manager Neil Woodford sold his stake in Rolls Royce in December. As it is the 43rd largest company in the FTSE 100, the passive guys can't play that game.

Later that month the short sellers were out in force: more than 6 per cent of beleaguered FTSE 100 company shares were out on loan. Yet passive funds, by definition, must just stand on the sidelines and watch.

On the other hand, many active managers also fail in declining markets. They cannot escape the inherent logic that investment is a zero sum game, so for every active manager beating the index there is an active manager trailing the index.


Over the past three months to early February, the FTSE 100 slipped from 6364 to 5982, a fall of 6 per cent.

The average fund in the UK all companies sector dipped by 5.5 per cent after fees. Some 132 funds (out of 259) outperformed the return on the FTSE 100.

Vanguard, best known as an index manager but also a producer of active funds, tells me: 'There is a common perception that actively managed equity funds will outperform their benchmark in a bear market because, in theory, active managers can move into cash or rotate into defensive securities.

'In reality, the likelihood that these managers will move fund assets to defensive stocks or cash at just the right time is low. Most events that cause major changes in market direction are unanticipated.'

So that's when we look at the whole overpopulated universe of active managers, including index huggers and bad eggs. Digging deeper, I wanted to know if any individual managers can be seen to have a track record of doing well in bear markets.

It should be said that for investors, the capacity to outperform in bear markets as an indicator of quality on its own is not always desirable.

James de Bunsen, fund manager on the multi-asset team at Henderson Global Investors, says: 'For some managers who did well in 2008 and then again more recently, it is simply in their nature to be bearish. The challenge is to protect money on the downside, while also keeping up in rising markets.'

Pulling off this trick is a good way for a fund manager to supercharge returns. Certainly, downside protection is important. If a £1,000 investment falls by 20 per cent to £800, it then has to grow by 25 per cent simply to achieve its former level.

So missing the dips is obviously positive for long-term returns. De Bunsen points to managers such as Angus Tulloch at Stewart Investments (previously First State) and Nick Train at Lindsell Train, both of whom have proved adept at preserving investor capital through both bull and bear markets.


We asked Morningstar to crunch some numbers to find funds that had outperformed their benchmarks by meaningful amounts (4.5 per cent, which seemed to sort the wheat from the chaff) in both the bear market of 2008 and the turbulent markets of the past six months.

This 4.5 per cent figure is an arbitrary 'plimsoll line', and of course the two-year bear market in 2008 was longer and deeper than the current one, but we think it spotlights the work of active managers who are repeatedly earning their crust and avoiding the insidious, expensive index-hugging we hate.

We found 10 funds that achieved the target. Of those, two Newton funds and one Invesco Perpetual fund have had a change of manager. That leaves seven funds run by seemingly impressive all-weather fund managers.

I don't want to be indelicate, but we can assume that these managers are not 'spring chickens'. Good managers need time to show that their performance is not just a fluke. Ian Rees, head of research at Premier Asset Management, confirms the importance of experience.

'The key criterion is that managers should be experienced, not necessarily in terms of the number of years, but in terms of having experienced different market conditions. A manager who has managed a mid-cap fund for the past four years will never have gone through a bad period.'

This is, of course, rear-view mirror stuff, and it provides no certainty about the way these managers will perform in future. However, while returns are uncertain, costs are certain, so reducing costs should always be a goal. Investors must always look at how much it costs them to hold and manage their investments.

And they should also look for value. For example, Mark Barnett has delivered an 81 per cent return on his UK Strategic Income fund over five years, at a time when the FTSE 100 has been largely flat. That surely represents real value for money.

The active/passive debate should not be the old either/or binary discussion. Hargreaves Lansdown reports that nine of every 10 investors who hold passive funds also hold active funds.

I suspect that the relatively balanced view held by these investors is more sensible than the 'four legs good, two legs bad' thinking espoused by some.

Whatever your preferred approach, a consistent message across all camps is to pick your team and resist the urge to fiddle.

Vanguard research reports: 'Timing entry into or exit from an investment strategy is notoriously difficult, and it can lead to investors trailing the funds they're invested in by a meaningful amount over time (100-200 basis points on average).'

So, as the old adage has it, it's time in the market, not market timing that works, and following a sensible balanced 'diet' as well as looking out for experience and consistency. Why are the boring old messages always the best ones?


Lindsell Train UK Equity: Nick Train

Invesco Perpetual UK Strategic Income: Mark Barnett

JOHCM UK Opportunities: John Wood

Liontrust Special Situations: Anthony Cross

Old Mutual UK Mid Cap: Richard Watts

Royal London Sustainable Leaders: Mike Fox

Unicorn Outstanding British Companies: Chris Hutchinson

Holly Mackay is founder and managing director of Boring Money. She has temporarily gone into hiding as the cult of passive on Twitter erupts in a frenzy of disapproval.

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