I put an active fund manager on the spot yesterday

John Stepek talks to fund manager Charlie Morris about when you should use an active fund over a passive fund.


Charlie Morris: active fund managers can offer a "carefully considered value approach"

On Monday this week, I talked you through three questions to ask an active fund manager before you consider buying into their fund.

Now, most of the time, you're not likely to get a chance to directly interrogate every fund manager on your watch list. The point of the piece was more to give you a bit of a framework for thinking about how to choose a fund, than to actually ask those questions direct to the fund manager.

The thing is, we've actually got an active fund manager working in the office on a regular basis.

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It's Charlie Morris of The Fleet Street Letter.

So I thought I'd put my three questions to him and see what he came up with

Three tough questions to put to your money manager

In The Fleet Street Letter, he runs two investment portfolios 'Whisky' and 'Soda'. As you might just have guessed, Whisky is the higher-risk one, and Soda the more moderate one.

So I thought who better to put on the spot? Here's what he said.

John: Charlie, what's your strategy? Why should I invest with you rather than go passive?

Charlie: Passive has had one hell of a ride. I recall the years 2000, 2001 and 2002. They saw three consecutive years for losses for the major stockmarkets, and passive funds, of course, just rode them down. So by 2003, investors were truly fed up with the index and the active manager became king.

During the dotcom bear market, active investors who sought value and made sensible decisions, didn't lose money, at a time when the FTSE 100 halved. That led to the boom in absolute return funds a movement that I was fortunate enough to be part of.

During the next crisis in 2008, passive funds halved along with the index. But history didn't repeat itself instead, they rebounded rapidly the following year. The pain was short and sharp. As a result, passive investors had an incredible experience, because stimulus kicked in, which inflated asset prices. Active managers, who were thinking about the risks too much, got left behind.

Today, interest in passive is at a point where I would consider it to be dangerous. The intelligentsia have fallen in love with it. The conversation has moved from skill to costs. Don't get me wrong much of this is commendable. But it has gone too far.

In the world we face, where broad asset price appreciation seems extremely unlikely, a carefully considered value approach is essential. The index doesn't offer that. Active managers do.

John: So how much conviction do you have in your strategy? How many holdings do you have?

Charlie: Fleet Street is split into two portfolios. 'Soda' is the long-term, low-medium risk portfolio that has low turnover and low volatility. There are nine holdings comprising investment trusts, funds, and a little sprinkling of gold.

The other, higher-risk portfolio, which I call 'Whisky', currently has ten UK equities, two country funds and two sector funds a total of 14 holdings, with 15% in cash, waiting to pounce on the next opportunity. In 2016, we bought oil at $30, captured a surge in Taiwan, bought gold in February those are the sorts of trades I'm talking about.

These strategies are high conviction and the portfolios have high active shares with a value bias. (Editor's note: the "active share" of a fund reflects how different it is to its benchmark index).

John: What's your "skin in the game"? Do you invest in your own portfolio yourself?

Charlie: Most of the holdings are also held in the fund I manage for my City clients. I own all the equities in the Fleet Street portfolio, but not the funds, as I invest directly. I am also invested in my own fund. So yes, I have skin in the game. (And all my holdings are of course fully disclosed to Fleet Street Letter readers).

Charlie also left me with a final tip for spotting "closet trackers" actively-managed funds that are simply aiming to hug the index.

Because while Charlie might think that popular opinion has swung too far in the direction of indexing, he's not remotely blind to the huge flaws in the fund management industry that have led to that being the case. So the last thing you want to do is to pay a lot of money for active management and get passive instead.

"A fund is cheating if the top ten holding resemble the top holdings in the benchmark. If that's true, you may as well opt for passive as it is cheaper."

What to look for in an active manager

On top of that, he's also had an excellent 2016, and he has just put out his guide to navigating the murky, choppy waters of 2017, so now's a great time to get on board.

But I'd also point out that his answers are precisely the sorts of answers you should be looking for if you're thinking about investing with any other active fund manager.

A clear strategy and a considered thought process. High conviction once a manager is getting above 30-40 holdings (depending on the nature of the portfolio), you have to wonder how much value each individual new holding is adding. And a willingness to eat their own cooking.

Those three things are surprisingly rare in a fund manager. So as I said, you could do a lot worse than take a look at The Fleet Street Letter to find out how it's done.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.