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Active management – Cover story


Market cap is the lowest cost and simplest route to access a market but is not always the best. Nico Aspinall, The People’s Pension


ish Airways Pension Scheme, is more optimistic on the poten- tial of active managers to add value, even in public markets. He is adamant that despite heavily distorted markets, there are still opportunities for investors to add value but that most investors have been doing it wrong. “The standard institutional approach to active equity management [index plus 200 basis points] is an absolute killing ground,” he says. “There is little evidence of sustainable success in that segment of the market – for long-term investors, these strategies have a very low prob- ability of success.”


Stewart argues that investors should fundamentally change their perspective. “There is a wide body of evidence that a very high-conviction bottom-up equity approach is probably the most viable form of active equity management.” However, there is one key challenge for investors who wish to do so, Stewart acknowledges. The research also indicates they would have to embrace the near certainty of sustained periods of under-performance, a perspective that might be hard to defend in investment committee meetings. “Faced with more than three years of solid under performance, most trustees are likely to say that they can’t live with that and the scheme will divest from managers at exactly the point where things are being turned around. The best long-term managers can only outperform if investors give them the opportunity to outper- form,” he adds. “And that means combining four to six high conviction mandates rather than putting all the eggs in one basket.” But he is also adamant that this approach is not about picking a star manager or chasing short-term performance. “Ultimately, this is about fully understanding the investment process, it


has as much to do with culture as capability.” Doing so could help pension funds to be more comfortable with inevita- ble periods of under-performance, he believes. For those schemes, which do not have an in-house investment team, consultancies could provide the necessary guidance, Stew- art says. But it might require a fundamental change in perspec- tive, he admits. Going forward, a crucial question remains whether this change in perspective will be embraced not just by larger DB schemes, but also by rapidly growing defined con- tribution (DC) schemes. The challenges of the charge cap and their relatively modest asset volumes have largely confined them to passive strategies, while the poor performance of active asset managers has proven little incentive for change. But with DC scheme assets growing rapidly, there is evidence that they are increasingly considering active approaches. Auto- enrolment specialist Nest is at the forefront of this trend. Its £15.5bn under management is growing by around £400m a month, volumes that allow the scheme to negotiate harder on manager fees. The result is that it employs a range of active managers who cover asset classes such as emerging market debt, commodities, real estate and investment-grade bonds. Nico Aspinall, chief investment officer at £13bn workplace pen- sion provider The People’s Pension, says that cost awareness should not be conflated with index hugging. He sees the recipe for success in a systematic approach and having a higher active share. “It is still difficult to be an active manager in this mar- ket. I would not frame us as being a passive investor. Market cap is the lowest cost and simplest route to access a market but is not always the best. “We have some reasonably substantial deviations from market capitalisation and most people wouldn’t see that as pure pas- sive,” Aspinall says.


Adding value


Whether schemes focus on alternative, bottom-up equities or more systematic approaches, it appears that despite the perfor- mance challenges, investors are not ready to give up on active management.


One reason could be that the growth outlook and macro-eco- nomic challenges for the next decade might look different from the previous one, Stewart says. He believes that we are about to enter a period of low growth. “Equity indices will be very dull over the next 10 years. But precisely because the growth outlook is weak, investors will have to be open to look beyond indices. There are always going to be opportunities. Equities are a warrant on human ambition, a call option on human ingenuity and those things underpin growth, equities are the indispensable growth asset,” he believes. “If you want to capture growth asset returns you have to be highly selective, but it’s got to be the right kind of active management.”


Issue 100 | February 2021 | portfolio institutional | 19


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