The cult of equities might not yet be dead, but the cult of the star fund manager is certainly on the wane.
This throws up questions about the benefits of following a benchmark especially within the phrase do often heard from managers: “We are not benchmark huggers, we take an unconstrained approach.”
For example, as many as 90% of funds within the UK All Companies sector follow an index-plus approach, but how many of those fund managers would admit it? A closer look would show a great number using the above phrase and still hold HSBC, Glaxo, AstraZeneca and so forth.
When looking at what managers describe as “genuinely unconstrained” funds, investors need to be aware of the stock-specific risk they are taking on. For example, Standard Life Investments’ unconstrained funds are run, according to head of UK wholesale Jacqueline Lowe, in a way that allows the fund manager to use their alpha-generation skills to the full.
Having said this, investors should be aware of the greater volatility these funds may bring when compared to similarly-titled funds in the same IMA sector.
But benchmarks cannot be totally ignored because, as one wealth manager said to me recently: “We have to start somewhere” and the FSA would have a field day if clients were unable to measure whether their adviser and fund manager was doing a good job.
Without rehashing the benchmark-hugging versus passive debate, active management by nature carries additional costs for the fund picker – something we are all familiar with – though this in its way is endorsement for those with a genuinely unconstrained approach.
If you want a different investment performance, then you have to invest differently. So if you genuinely believe this is the best route to alpha, as an increasing number of fund groups obviously do, then showing faith in a fund manager who is investing against the grain is surely worthwhile.
To read the full argument, please see the Viewpoint article in December’s issue of Portfolio Adviser, published next week.
