The multi-asset team at Rathbone Unit Trust Managers is focusing on actively managed funds rather than passive strategies that follow the direction of the market.
The firm says it is important to generate alpha from a portfolio because markets could trade sideways. Alpha is used to describe the above-market return on an asset, having accounted for the risk taken to achieve the return. As active managers have the ability to outperform the market, they have the potential to generate alpha.
RUTM head of multi-asset investments David Coombs says his portfolios comprise mostly actively managed and few passive funds. His only passive holding are a structured product and an exchange-traded fund with exposure to gold bullion.
Passive investments had more of a role to play last year when markets were rising, allowing managers to generate returns through beta. Beta refers to the volatility of a stock in relation to that of the whole market. The price of an asset with a beta of one will move with the market. A beta lower than one will be less volatile than the market, while a beta higher than one will be more volatile.
Coombs says the best time to focus on beta is when markets have a strong directional pull. He says: “You might have a bullish view and want to ride the market through cheap stocks, so you would buy beta. But if your view is that the market could trade sideways or even lower, or there is likely to be significant volatility, you would look at alpha because you are not going to get returns through market direction.”