Ahmet Feridun, director of investment management at the firm since 2007, has spoken of the increasing difficulty in finding strong active managers who “justify” their charges and fees.
He told Portfolio Adviser that around 10% of Stonehage Fleming’s equity exposure was now invested in passive instruments which might, as Feridan accepts, seem relatively minor but is a significant change of direction for the family office whose past investments have historically been 100% actively managed.
And the only way this level of exposure will go is up, Feridan has predicted, as more ETF and passive products enter the burgeoning market.
He said: “Before the financial crash we saw quite a few of the active managers do well, there were some really good stock pickers and they were structurally supported too.”
But a combination of structural trends, rising indexes and greater availability of passive funds has put the world of the active manager at risk according to Feridan, particularly, as he points out, some low-fee ETF’s can even replicate the style of some active managers.
He added: “It means active managers have to be able to outperform not just the benchmark, but also their own style. Essentially we are moving more towards these replica passive products – where we can’t discern the benefit of paying high fees for an active manager we don’t, it’s a very easy way to ensure capital retention.”
A study commissioned by Stonehage Fleming around five years ago found the median ‘hit rate’ for active managers when making calls on when to buy and when to sell was just 47%, with Feridun discerning that “the average active manager got more wrong than they got right”.
When the hit rate of active managers enlisted by Stonehage Fleming falters, Feridun says he doesn’t fail to begin asking questions.
“If we see a deterioration in their hit rate then we start to question their ability to create alpha,” he said, adding they would not hesitate to switch to a suitable passive if it offered value. The direction of travel, Feridun predicts, will be for around 30% of Stonehage Fleming’s equity exposure to be invested in passives in the future.
