When does active management matter?

The shift of money from actively managed funds into those that track indices has been exponential in recent years. The growing focus on costs has been inescapable because much of the demand for investment solutions is cost-constrained and passive has often been the answer.

The major criticism of active funds is that they are expensive and they can underperform against a benchmark, particularly in the recent bull market. However, when costs are taken into account, tracker funds inevitably underperform their benchmark too, and when markets change unexpectedly, which they often do, it can be problematic.

In the recent bull market, tracker funds have inevitably performed well and have been seen as a one-size-fits-all. However, as the Financial Times recently observed, "Index trackers are no miracle remedy. They are more like antibiotics: valuable when deployed in moderation, but likely to do more harm than good should their use become too widespread".

Passive products do have an important role to play particularly within longer-term investment portfolios where the impact of market volatility is less critical. However, in other circumstances, passive asset allocation may also create problems because decisions are made based on historic correlations between asset classes and past volatility. The major criticism of active funds is that they are expensive and they can underperform against a benchmark, particularly in the recent bull market. However, when costs are taken into account, tracker funds inevitably underperform their benchmark too, and when markets change unexpectedly, which they often do, it can be problematic.

Equally, many investors who choose active management are looking for different outcomes such as retirement income. Both active and passive management has a role in a portfolio; however at BMO Global Asset Management we have more concerns about closet trackers.

AUM evolution

AUM evolution

Source: Broadridge Fund File as at 30.09.2017 in Sterling GBP. Excludes Money markets and only includes passive Funds. Other includes Hedge and Property assets. Fund Market is based in the UK. AUM = Assets Under Management.

Genuine active management can respond to changing market conditions so, as we move into a more challenging part of the economic cycle, this becomes an important consideration.

A good example is the investment process used by the new BMO Universal MAP range. It has three proven active components:

  • strategic asset allocation
  • manager selection
  • tactical asset allocation

As with all investments, it is important to note that the value of investments can go down as well as up.

Strategic asset allocation

This is the main lever of the investment process and takes a long view of global markets. The top-down asset allocation process undertaken by our team combines a quantitative process with a qualitative evaluation. The asset allocation has permitted ranges, which offers our experienced team the flexibility to reflect its market view and take a defensive position where it believes it is more appropriate. Unlike many asset allocation strategies, we review ours quarterly to enable more minor shifts in the approach, ensuring we keep within volatility levels and expected return targets. This investment philosophy is also used with our institutional products.

Manager selection

Using the foundation of asset classes from the strategic asset allocation the team screens strategies to select the best solution for the fund in each category and selects the appropriate experienced managers. For this range, we use our best in-house managers, many of which have long track records of beating benchmarks and are responsible for collectively managing £188 billion (as at 31.01.2018). The importance of experienced managers is most significant when markets are more unsettled.

Tactical asset allocation

The strategic allocation is reviewed quarterly, but as we have often seen, events can occur at any time in the cycle, so our Multi-Asset team, who manages the BMO Universal MAP range, evaluate the tactical asset allocation on a monthly basis. The team reviews:

  • asset class allocation between equities and bonds on a global basis
  • geographical allocations within equities
  • sub-asset class allocations within fixed income

In a changing market place where cost is a major consideration, the need for new and innovative solutions has never been more important. Until now investors have faced a binary choice – low-cost or active. With the BMO universal MAP range, investors no longer have to choose; genuinely active multi-asset fund management is now accessible at a low cost.

For professional investors only

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

© 2018 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM15871 (02/18).