Active funds double returns of passives
In the chaotic sell-off of the global pandemic, and subsequent rebound, active managers outperformed...
One of the most common laments we hear when we meet managers right now is that we are in a ‘low growth world’. It is approaching ten years since the financial crisis and governments of leading economies, heads of central banks and international monetary committees are still trying to come up with inventive ways of stoking the fire in the world’s economic engine room.
But despite a slew of increasingly experimental policies, there are fears that the powers that be are running out of tools to stimulate this growth. Japan has been trying every play in the book to boost their economy, but for 15 or so years has been suffering from stagnation. They are now toying with the idea of printing money and putting it in people’s bank accounts, an idea that could open the floodgates for super abnormal monetary policy.
Even Mark Carney in his Bank of England speech last week fired a pre-emptive bazooka at the economy in an attempt to stave off the prospect of a Brexit-related recession.
With consensus growth estimates for the UK now firmly lower than they were before the Brexit vote, the US little better, and even the best emerging economies around mid to high single digits, there are big questions as to where any growth can be found.
For equity investors, all this translates into incredibly volatile stock markets of late, which are masking some of the longer term trends. For example, we have seen oil and commodity equities hit record highs and lows, and big daily moves on leading indices. So, while ‘average’ growth maybe minimal, it doesn’t mean that there aren’t massive winners, and by contrast, massive losers within these markets.
The prospects of whole sectors or countries can change very quickly. With this in mind, good stock picking is more important now than ever. Just look at Finland, who had nearly half their economy (Nokia and paper products) almost wiped out through the invention of the iPad.
Had you been in a passive European index fund, which just replicates the stock market, you would – by default – have been holding the aforementioned defunct companies. You’d also be stuck with things like Greek and Italian banks and Spanish property companies. As these companies’ growth prospects changed, they fell in value and dropped out of the index. Only then could they sold by the passive index fund manager, right at the bottom. This is why fund selection is now so key.
By contrast, active managers can be more flexible with their choices. For example, Alexander Darwall of Elite Rated Jupiter European owns Ingenico, a digital payments company that is one of the world leaders in contact-less payments, a fast growing area in the last few years as we move towards a cashless society.
Another example is Novo Nordisk which makes highly advanced diabetes treatments, capturing the increase in the problem brought on by modern diets. These are established companies with niche products, able to grow despite the global headwinds.
Even within traditional industries we can see growth, especially in the evolution of products. Douglas Brodie of Elite Rated Baillie Gifford Global Discovery is strongly invested in Ocado. They have a unique, automated food delivery service. They have made online food ordering cost effective, bypassing their rivals who have inefficient, capital-intensive programmes based from stores. Online deliveries are surging and Ocado are well placed to take advantage of it.
Douglas also has a company called MarketAxess, an online bond trading platform, thereby benefiting from a revolution in a market still very reliant on telephone and peer-to-peer sales. These are again just two examples of companies in mature, arguably struggling industries, but with fantastic growth prospects.
While we may be inextricably moving towards a lower growth world, there are still opportunities, even if monetary policy fails to be the tide that lifts all ships. By choosing active managers whose diligent research and strong stock selection has consistently delivered returns, investors can continue to benefit from the pockets of growth when and where they appear.