IFAs who invest clients’ money with active fund managers should avoid those who aim to hug the index if they want to see the best results, according to Martin Currie.
Speaking at the Honister Capital annual conference in Brighton last week, Martin Currie head of intermediary sales Alan Burnett said IFAs should be ready to accept short-term underperformance in return for long-term results.
He said: “If you are going active, find a manager who is willing to step away from the index, ignore the index hugging mentality, then give them time. If and when they underperform for six or 12 months, do not panic and sell them because those guys are willing to do that.
“Active management in my view is moving away from the index not churning your portfolio over three or four times a year.”
Burnett says hugging the index makes sense at a time when markets rise continuously, but with the current unpredictability trying to gain off the average growth is not the best way forward.
He said: “For 25 years the market just kept going up and we all believed it would keep on going. That is the environment where I think you should have had a lot of trackers, because if the market keeps going up, bring your costs down, pile into the index and do not worry about it.
“In the current environment do not hold the average, do not hold the whole index.”
Burnett said future growth areas like China may be good places to seek profits, with emerging economies expected to be a greater part of global GDP than developed economies by 2013, but investment needs to be targeted.
He said: “China is about 1 per cent of the MSCI index at the moment and it is soon going to be 12 or 13 per cent of global GDP. You are not going to capture that growth if you just try and buy an index.
“Countries and regions are far less important than companies and sectors.”
Burnett said index hugging and passive investing rely on the hypothesis that markets are efficient, but he insists they are not.
He said: “It would be a pretty sensible view were it not wrong. Do not take it from me, Warren Buffett said ’I would be a bum on the street with a tin cup if markets were efficient’. Markets are inefficient and we think they will become more inefficient than they have been in the last 30 years.
“The debate is not if active or passive management is right or wrong, it is about how you get good active managers and then mix them with good passive managers.”