Q1 Andrew, we are looking forward to hearing your insights at the International Fund Management 2017 Summit (London, 8-9 March). Please tell us about yourself and your experience
A graduate in Mathematics from the University of St Andrews way back in 1984 and having worked in the investment management industry since then, largely focused on high conviction, active equity management in long-only and long-short strategies. Currently Head of Equities at Hermes Investment Management, a leader in Responsible Investing with £29bn of assets under management. Recently I took on the additional role of Head of Impact Investing to build on our credentials in stewardship and sustainability.
Hermes Investment Management Limited is based in the UK and 100% owned by the BT Pension Scheme, providing us a long-term perspective on investing and active corporate engagement.
Q2 You will be joining presenters from Aberdeen Asset Management and Blackrock on a ‘Active vs Passive’ panel discussion. Do you believe that this debate is of great importance, and what do you believe are the advantages of active investing?
The world of ultra-low interest rates, weak inflation and sagging growth has challenged investment managers and plan sponsors alike because of the paucity of return available to meet the needs of long-term requirements of savers. In this environment, the debate has raged on the best way for long-term investors to access market returns, with fees sitting alongside performance as a critical point of discussion. With the investment industry experiencing growing regulatory scrutiny, especially around transparency and cost of investment services, the pressure is on all investment firms to demonstrate that they offer value for money and an alignment of interests with client objectives.
One important aspect of active management is the role it plays in price discovery in the wider market by helping to encourage and reward value creation within businesses. While not all active managers can outperform, a purely passive market would severely limit the ability of the capital markets to encourage the efficient long-term deployment of capital.
Active management, if done skillfully, also brings a more dynamic approach to risk management and the ability to avoid some of the systemic traps that momentum led markets bring by in their wake.
The rise of smart-beta also suggests that passive product providers see systematic opportunities to add-value over traditional market-capitalization weighted benchmarks. Active management, therefore, is about demonstrating a cogent framework for exploiting market inefficiencies, rather than assuming an automatic “zero sum” outcome. Part of the advantage, and challenge, for active managers comes from taking a long-term perspective and stepping outside of the noise of markets. In effect, time becomes a true arbitrage for active managers.
Q3 What case studies and examples will you draw upon for the discussion?
Experience has taught me that skill does exist in the active investment industry, but it is hard to identify and harder to stay with over the long-term due to the inevitable volatility of shorter term returns. As an organization, 90% of Hermes’ active equity capabilities have outperformed their benchmark over 3-years, with a number of managers having track records of consistent excess return over decades. Too many of the studies on the failure of active managers to add value after fees are based on reference to mutual funds benchmarked against the S&P 500 index; evidence elsewhere suggests a more balanced experience (e.g. Asian and European equities)
Q4 What do you believe are the challenges in delivering alpha clients in volatile market conditions?
The classic challenge in markets is the behavioral one of remaining true to your conviction in periods of elevated market volatility. In truth, volatility is a friend to the active manager, as it provides the opportunity to buy other people’s fear or sell into their greed. Clients can be a challenge too, especially in the private wealth arena, as their time horizons are not always aligned with that of the manager. Experience suggests that it is often the clients that are more reactive and short-term than the managers, which can affect the ability of a portfolio manager to stay in the game during difficult times.
Q5 Is the co-habitation of active and passive possible in your opinion?
It is essential in my opinion, and both are legitimate forms of accessing the needs of investors. No market should be without competition and in every industry, credible alternatives act to raise, not lower overall standards
Q6 You will also be providing a presentation on delivering alpha to clients. Why do you believe this is a key talking point, and what key considerations must investment firms and financial institutions make?
The required areas of focus for active management are:
- Time horizon – long-term
- Structural opportunity that is exploited – exploitable skill set
- Portfolio structure – high active share and conviction, low turnover
- Humility – know your weaknesses
- Responsibility – active engagement and ESG integration
Q7 What key challenges do you foresee in the next 6-12 months for asset and fund managers?
Every year is a reloading of the challenge of demonstrating your ability to add value to uncertain markets. Over the last 30-years I have probably written “next year will be a challenging period…” every year, and each year I was right but for ever varying reasons, and rarely the ones envisaged! Politics and regulation remain the top picks, but the death of secular stagnation as an overarching investment strategy is bringing challenging times for managers crowded into the same narrow band of popular stocks.