Despite his scepticism towards the active camp, Jack Gray does not believe that passive management provides a comprehensive solution to funds’ needs. He says: “You don’t want total indexing. It’s just momentum: it prices up securities and causes them to get beyond fair value.” It would also mean that promising companies, or those undergoing a turnaround, can be shouldered out of investors’ view by big names in the index. “From a market perspective, if you’re a passive investor, you think you’re not making a decision – but you are.
In 1999, you were making a 30 per cent bet on technology stocks,” Gray says. “In 1980 it was oil. And tech and oil bubbles were cyclical problems. As long as the market is broadly diversified, you’re getting cheap beta. But there is a timing aspect.” Gray, whose research with Ron Bird is looking at investor attitudes to active and passive management for the Centre for Capital Markets Dysfunctionality, says managers hold an information edge over institutions in the capital allocation game.
He says: “This is a market where there is a massive information asymmetry. Super funds know very little about what managers are doing and how they’re doing it. People buy things on trust and good stories – and we can all tell good stories. “There is very little performance persistence beyond a couple of years. We know that, but managers still say, ‘I can do it’.” If funds are committing to active management, they should be prepared to do so with conviction, advises Ross at GSJBW. “Not enough pension funds take enough risk.
They think there’s a free lunch and that you can over-diversify the portfolio and outperform. If they believe in active management, there’s no point diversifying their portfolio to the point where it takes on the semblance of an index. Given the wide ranges of opportunities that now exist across markets, they should reduce diversification and take on more risk.” THE INFLUENCES OF AGENTS “Active management outperforms, but you can go overboard by having too many active managers,” Turnbull at LGS Super says, commenting on the tendency for some funds to overpopulate their portfolios with stock-pickers.
One much-needed development in the super industry, comments an institutional adviser who declined to be named, is for funds to develop deeper internal resources and stronger relationships with fewer active managers, and rely less on consultants and other intermediaries while designing portfolios. The adviser comments that portfolios have become too complicated – not in asset class exposures, but in the length and variety of manager line-ups – due to the asset consulting model used widely here, which was imported from the US.
