Active management
Some good questions, that we (Aequitas) tend to get from clients/prospective clients.
What happens if you underperform.
A good and fair question.
Firstly, we agree with the sentiment, most managers underperform the benchmark.
Here it is for equities, but on average, most of them, despite wonderful marketing decks, big names, huge teams, massive financial resources, fail to beat the benchmark.
Confronting!
This is why, in our asset allocation, the vast majority of exposure to each asset class is low cost, ease of implementation passive vehicles.
Keep the costs low, recognise this issue around performance, and you’ll likely do well.
So, we agree! It’s a real thing.
Next up, not only does the average manager underperform, those that do outperform tend to have no persistence.
Outperforming in one period, giving it back in the next.
We agree! Partly, that’s why we factor rotate, that’s why we do trim managers into strong periods of outperformance, but again, it’s really just a reason to have most of your core asset class exposure in low cost ease of implementation vehicles.
Then there’s issue of “higher fee correlates to less alpha”. A while back Grattan did an excellent piece on the Australian funds management industry, chart below.
So it’s not just about limiting the number or size of the active managers, it’s also about making sure you aren’t paying 130 points for an equities allocation. Mostly, high fees reflect prior success, and FUM gathering, which based on the above points tends to be met with poor ex ante returns, relative to benchmark.
So, what does this mean, how does it help anything. Well, I suppose for the most part it reframes the negative aspect of the question.
If the underlying client fund (i.e. it’s allocation) has an allocation of above say 30% to active managers, and they’re worried about under-performance, well that’s probably the best place to start, a place where errors can compound, rather than diversify. A great saying which mostly tends to turn up in direct equity analysis, but one that also lends itself to the line up of the equity managers in general: “all the problems are already in the portfolio”. I.e., it’s what you own, that kills you, more so than what you don’t.
We think a core satellite approach works well, with a high conviction allocation across dedicated factors, confined to the weighting implied by “satellite”.
And hopefully, that gives us the best of Bogle, and the best of DAA value add.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
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