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BP shows the benefits of active management

Aidan Kearney is co-head of multi-manager funds at Aberdeen Asset Management.

How would a client react if their broker or fund manager invested 7-8 per cent of their investment savings into a business, only to see it collapse 45 per cent. Not very happy I suspect although both positions, one could argue, are entirely understandable.

Even after the price fall brought on by an epic environmental disaster, BP is still a 5 per cent weight in the FTSE 100 index. Already I have read an article suggesting Neil Woodford’s genius at removing oil companies from his income funds last year on concern about dividend payout capability although I am certain even he didn’t foresee events unfold as they did.

Consider the index weighting situation. There is regular commentary promoting the benefits of low-cost index investment options such as exchange traded funds over the higher-cost option of active fund management.

There is, of course, plenty of merit in this but fairness at least requires that the resulting portfolio composition is also understood and this would allocate almost 50 per cent into 11 companies, including banks, oil, mobile phones, drugs, mining and tobacco.

Two companies alone, HSBC and Shell, comprise 17 per cent. Of course these businesses are big because they are successful but so too is BP, as was the tech sector back in 1999 and banking in 2008 when these sectors comprised over 20 per cent of the index, only to fall substantially in due course. Such are the realities of the lower-cost option.

The world of active management provides a breath of choice in how to dissipate this risk. Consider the approa-ches of three different managers. Four Capital is a small investment manager offering a fundamental research-based approach delivering a risk-controlled, focused portfolio – UK active fund – predominantly in large cap quality names. GLG has arrived in the UK retail investment space from the hedge fund world and, while also based on fundamental company research offers a more dyn-amic top down macro approach sensitive to short-term investor sentiment with UK select equity, launched in August 2009. Finally JO Hambro Capital Management UK opportunities, another independent manager and this time a fund which reflects the manager’s personal bearish view of the current environment. All three funds comprise around 40-45 holdings – two included BP – all three also outperformed the FTSE 100 by 4 per cent, 5.3 per cent and 8.1 per cent respectively (data from launch of GLG fund from August 3, 2009, to June 11, 2010). By definition, each fund has also out performed the leading FTSE ETF, which incidentally underperformed the FTSE 100 index itself by 1.1 per cent over the same time period.

That is not to say that lower-cost options such as ETFs have no role to play in the multi-manager world, quite the opposite in fact. They are very useful portfolio construction and tactical asset allocation tools when used appropriately but longer term are held back by the small matter of structural underperformance. The price of active management, when one understands the approach and process employed by the specific manager, is a better investment.

Aidan Kearney is co-head of multi-manager funds at Aberdeen Asset Management

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 28th June 2010 at 3:36 pm

    The active vs. passive debate seems to be never ending, with no party ever publishing definitive data on the performance of a range of indices over 5, 10, 15 and 20 years so we can compare these against the performance of all the best known active funds. And the trouble is, actually getting hold of performance data on various indices other than our own FTSE 100 seems to be amazingly difficult. Where is it all for heaven’s sake? If somebody would publish it, then the debate would largely be over.

    How does the performance of say Fidelity Special Sit’s compare with those of the FTSE Mid-250 or 350 or 500 or All Share indices? I dunno ~ somebody tell me where I can find the data.

  2. Surely you jest ? The market data is out there, in fact there is an abundance of data available via the likes of Morningstar, Trustnet et al

    The biggest problem is finding composite data for combinations of indecies but the basic information is certainly out there.

  3. Julian Stevens 28th June 2010 at 4:48 pm

    I just did a google search on “5, 10, 15 and 20 year average annualised growth on FTSE 250 index” (i.e. in a format directly comparable with the funds performance data published by Morning Star in Money Management magazine). You try it and see what you get.

  4. Tim Harrop-Griffiths 29th June 2010 at 9:11 am

    I’ve been busy on Morning Star finding the % of fund assets in the top 10 holdings of some of the more popular funds:

    Fidelity Special Sits – 38.03%
    M&G Recovery – 38.97%
    Jupiter UK Growth – 45.89%
    BlackRock UK Income – 49.4%
    HSBC FTSE 100 Index – 48.28%
    HSBC FTSE All Share Index – 39.41%
    HSBC FTSE 250 Index – 11.10%

    It’s amazing how selective you can be when you want to distort the picture – or protect your inflated ego and pay packet.

  5. Robert Curwen-Reed 29th June 2010 at 11:36 am

    OK, so the BlackRock UK Growth Fund has nearly 50% in the top ten funds. However these 10 companies are have been carefully selected to add value to the portfolio rather than the arbitrary inclusion based on size with no regard for value or growth potential within a tracker fund. I know which I would rather have.

  6. Tim Harrop-Griffiths 29th June 2010 at 3:21 pm

    Robert, do you know how much of the BlackRock fund is invested in BP? It’s 2.56% less than in the 100 Tracker fund – not really a massive difference and certainly not one to base a managed v passive argument on.

    The proof of the pudding is in the eating – survey after survey of it!

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