Whatever the reality, nagging questions over the value of active management have led many investors to conclude that cost and cost alone are what matters when choosing stewards for your money, and that’s led them rushing into the arms of the passive industry.
We’re strong supporters of passive products, too – they’re great for gaining exposure to hard-to-reach areas, and as a means of cost-effectively implementing asset allocation strategies, like the ones in this week’s Big Theme on page 54. But when finding homes for your money passive and active are not mutually exclusive, and we think such a round dismissal of active management is throwing the baby out with bathwater. One reason is that, as Charles Plowden, a senior partner at Baillie Gifford, excellently put it in a letter to our sister publication, the FT, in response to recent commentary, “active investment management is not a homogenous activity”. Sure there are plenty of poorly performing funds that charge too much, but there are many great managers – great stockpickers – who owe their success to far more than just luck.
Mr Plowden argues that what is more important is working out the identifiable traits that lead some managers to consistently outperform, which echoes our own long held view and is why five years ago we began our Top 100 Funds. We take a largely qualitative approach, because it’s nigh on impossible to benchmark funds on anything other than performance and cost – both of which, at a headline level, can be misleading. But in essence we are searching for the traits Mr Plowden refers to.
I think our list is useful even if you don’t plan to buy funds, because our write-ups offer insight into the strategies that make the Top 100 managers successful. At risk of over-simplification, I’d like to round off by summarising them: buy quality, and try to do it at a reasonable price, and don’t buy average companies just because they’re cheap; buy companies with a defensible competitive advantage that allows them to protect margins and grow profits; strong management and commitment to corporate governance matter; so do strong balance sheets, which along with cash flow fund dividends and future growth without diluting shareholders, and limit downside risk; size doesn’t matter, because good returns can be had from small and large companies alike; and don’t panic if a tried-and-tested strategy underperforms for a while, because – and this is the most important trait – it’s the long term that matters.
