Battling volatility: The benefits of an active manager

SPONSORED CONTENT – Alastair Wilson, managing director of Close Brothers, on the advantages of active investing in times of crisis.

Most stock markets have fallen by more than 20% in recent months due to coronavirus fears, but many of our bespoke client portfolios at Close Brothers Asset Management remained resilient due to the ability of our investment managers to continuously manage risk and quickly respond to market conditions. Although passive investing via a tracker fund (index fund or an ETF) can be lower-cost, in this instance, taking a purely passive route has left many investors at the mercy of the markets. Alastair Wilson, managing director, explores the advantages of active investing in times of crisis.

The benefits of stock-picking

At Close Brothers, we invest directly in individual stocks or indirectly using funds. Index trackers certainly have their uses – however, I much prefer picking individual stocks for my clients because I believe it holds the best potential for outperformance.

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Why hold 3,500 to 5,000 stocks in the S&P when you can instead simply own the 20 stocks that you believe could outperform? Yes, diversification is important, but you don’t need thousands of holdings in your portfolio to diversify effectively. Index trackers by definition put your money into broad range of assets – both outperformers as well as underperformers. What we aim to do with stock level analysis is weed out the underperformers.

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It is unlikely you wish to invest for the average return. At Close Brothers we’re looking for companies that are growing their earnings and dividends. We want to invest in companies that have pricing control – ones that are globally dominant, such as the internet retail giants.

Passive investing: cost isn’t everything

We do make use of tracker funds at Close Brothers. They are useful for allocating money in a low-cost way when you need access to a general exposure. So in the right context, we can and do use them to focus in on a particular theme, sector or region.

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However, there’s a lot of lazy thinking about the cost of investing when it comes to some passive strategies. Let’s say you invested £100,000 in a tracker fund within a discretionary managed portfolio. The idea is that if you can buy a tracker that costs around 0.08% a year, then you may save yourself close to £920 annually in management fees (assuming that active management costs around 1%). That may well be the case.

But the risk is that by simply tracking the market with the aim of saving money on costs, you miss out on the potential for substantial outperformance. With active management, you may pay 10 times as much in management fees but potentially make far more than that in additional returns. For a lot of my clients this settles the matter. However, if a manager can outperform their passive counterparts, they can also underperform just as much.

Why choose the bespoke option?

When putting together a portfolio, at the core of the in-depth conversation with the client is how much risk they are willing to take. We then tailor the portfolio to their individual needs and their own risk appetite. It’s about getting clients to understand the assets they have and what the opportunity costs are. We have the discretion to vary the investments in accordance with the specific requirements and needs of the client.

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A bespoke portfolio offers the potential to control the downside more effectively in a market downturn. For example, the types of conversations we’re having at the moment are about scenario planning for the aftermath of the current crisis. If you’d owned a simple tracker fund, you’d be exposed to the full global fallout of the Covid-19 crisis, including dividend cuts of around 30 to 40%.

So it’s unsurprising that clients are currently asking us: “How vulnerable is our portfolio income – do we need to make changes?” In the UK, for example, we’ve already seen something in the region of £35bn of dividend cuts by companies as a result of the crisis. If clients are expecting an annual income from their portfolio and it’s going to be substantially less, they want to know we can bridge that gap from capital. If they have somebody to talk to about this they feel more reassured.

Responsible investing

With a bespoke portfolio it’s also easier to ensure that your money is invested according to your personal values and beliefs. Many of our clients want to invest their money in companies that act responsibly – that are looking after their employees, positively contributing to society and preserving the environment, for example.

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Our in-house research team incorporates environmental, social and corporate governance (ESG) into their research process so that we can easily identify investments that could be aligned to specific values that clients are concerned about.

Opportunities in the downturn

The downturn is also a good time to take stock review and refocus your investments. Questions you might consider: “Do I really think commercial property is a good place to be or should I focus on supermarkets or healthcare assets? Or if I’ve never owned internet retail giants before should I buy them now?” Maybe even “Healthcare is also still going strong, and I believe public health will be an even higher priority from now on.” There is also an opportunity to own assets that may have previously looked too expensive.

Passive investments certainly have their place – but in the current market climate we believe there are some opportunities that can only be accessed effectively by experienced investment professionals, who may not have seen this particular crisis before, but have experienced previous market disruptions.

Your capital is at risk. Investments can go down as well as up. Past performance is not a reliable indicator of future returns.

For a complimentary review of your investment portfolio, contact Sarah Keltie from the private client team at Close Brothers Asset Management. Enjoy this limited time offer until 31 July 2020, exclusively for MoneyWeek and The Week readers. | +44 (0) 20 7426 4077

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