Caption: FMB's Richard Hancock
"A few weeks ago I was asked to take part in a round table event organised by Citywire regarding Multi-Asset investing. The event took place in Tower 42, the 2nd tallest skyscraper in London and required a train at stupid o’clock in the morning in order to get there for the allotted time. It also happened that the day selected for this event coincided with the funeral of Margaret Thatcher which made for an interesting journey. Taxis had to stop some way from their destination and the journey continued through extremely quiet and deserted streets not a car in sight.
On arrival I duly made my way up to the 26th floor, encouraged by the fact that this was the same floor as Gary Rhode’s restaurant and the invite promised lunch; unfortunately, lunch turned out to be a buffet rather than a fine dining experience but it was nice none the less.
The session started with a load of photos being taken of the various participants and then before long we were all seated ready to start. What struck me about the day was the wide range of approaches and opinions there were regarding multi-asset investing. I had naturally assumed that the invitees would all be of more or less the same opinion with disagreements being of a more technical nature about detail, process and opinions on certain asset classes but it was far more fundamentally divided.
There was one cam who firmly believed not only in multi-asset investing but also in outsourcing these decisions to professional managers, I count myself in this group and there was another group who believed in a long term tactical approach generally achieved using passive instruments (index trackers), oh yes, and one person all on their own pining for a return to With-Profits of all things!
Interestingly, it seemed to be the smaller companies with less resource that insisted on building and running portfolios themselves and the larger, better resourced companies such as FMB who insisted that outsourcing was the way to go. I found it very revealing that the ones who were in the best position to run portfolios were the ones championing outsourcing while those with limited resource were running their own models. Only time will tell who has the right approach although for my own pension and my own investments I practice what I preach and am invested in multi-asset, managed funds despite spending pretty much every waking hour looking at funds, I still would rather have a professional, external manager running my investments than myself.
As for the active vs passive argument, this has been raging for many years now with no clear winner; my view and that of FMB in general is that active managers can add real value over time if perhaps not in every single discrete period and as such they are worth the fees we pay them. We believe we have a robust and detailed research process capable of weeding out the winners and avoiding the losers. The other issue is the long term strategic asset allocation versus the shorter term (more active) tactical asset allocation argument.
All you need to do is look at Gilts right now to argue this point; all long term strategic models use Gilts as their main defensive asset class; it is after all the only fixed interest group that retained its diversification benefits during the credit crunch but now is a different time; Gilts look very expensive and yields are on the floor with seemingly only one way to go; when this will happen is still very much debateable but the fact that it will happen seems to have been agreed upon by pretty much everybody. What this means in practice is that a long term strategic asset allocation for a very low risk client will tend to include a large weighting to gilts at a time where there is the very real possibility of looking at 20% capital losses resulting from a 1% rise in interest rates. The proponents of long term strategic asset allocation will argue that this is a short term issue and over the long term their process will work but I would say, why slavishly invest in assets that are set to fall in value? Surely there is something else we can use? This is where the managers who employ a more tactical approach have the freedom to avoid Gilts and use other defensive asset classes; the types of asset class that cannot be replicated in a passive manner such a direct property, non-directional strategies and a number of hedge fund strategies and absolute return funds.
Click here to see a clip of what the Aviva Fund managers think about the current issue surrounding Gilts taken from the round table discussion, with a little cameo from me at the start.
As I have said, only time will tell who is right but I am comfortable with my choices and believe we have the right approach. This is the approach we will apply for all our clients."
All the Best
Richard Hancock, FMB's Chief Investment Officer