Passive Active Debate

The passive/active debate is a hot topic right now!

While the focus of the industry has been on returns generated, and fees paid, we feel the more pressing issue which needs to be addressed, is skill.

The whole passive argument is built on the idea that an active manager is unlikely to outperform its benchmark. Add fees to that equation, they will most probably underperform! Why invest, then, with someone who isn’t doing anything that different from the benchmark and pay them for it?

As it happens, as passionate active managers, we agree!

Mediocrity has been rewarded in our industry for far too long now. The rise of technology has seen an increase in the popularity of commoditised strategies which perform well enough for the end investors. If this trajectory persists, funds will continue to flow in this direction.

However, we think scale won’t be the saviour the industry is hoping for.

In our opinion, only those with a truly unique skill-based offer will be able to survive this shift. Unfortunately, remaining unique is getting harder and harder, particularly as the incentives to conform (think stick, not carrot) are becoming so large. As a society, we tend to aspire to averages. i.e. you are healthy if you don’t deviate from the average height and weight for your demographic.

This is no different to what is happening in our industry.

People are focusing on the benchmark and the returns it generates as the reference point to measure how good a job you are doing. The more people who buy into this idea, the harder it becomes for the unique to survive, and the system becomes self-perpetuating.

To us, investment management is more than just generating higher returns than the benchmark. While this is important, there are other qualitative issues which are a central part of what we do. For example, we recognise that capital allocation can be a useful way to drive change. We have the opportunity to demand specific standards of Corporate Governance from our portfolio organisations. We can decide whether specific social and ethical issues are acceptable and, if they are not, vote with our feet.

As custodians of our clients’ money, we feel it is our job to ensure we’re doing whatever we can to not only preserve their capital but grow it over time. We do this by allocating capital to investments which are sustainable in the long term.

We believe active investment is the skill the future needs, since it can deliver genuine, long-term, sustained growth in wealth.