The yin yang of funds management Investing in uncertain and choppy markets is tough. Big deal. For active managers to argue they are true alpha sources, their returns need to be uncorrelated. “The fact the market was down-to-sideways shouldn’t be an excuse for active management,” says ipac’s Rogers. They should not need a good market over a decade, upon which they can apply leverage, to deliver good returns. Sure, at the beginning of the decade, valuations soared at the fullness of the dotcom bubble, and the financial crisis later dealt investors another market rout. “But if someone is saying, ‘I’m an alpha manager’, and you give them 10 years and they can’t deliver over 10 years, over what kind of period can they deliver?” Rogers asks. This scrutiny of active managers is valid. But it is also within a super fund CIO’s remit to know when managers’ performance streaks are over. Hartley draws on the ancient Chinese philosophy of yin yang, which states how seemingly contradictory forces – like good and evil, success and failure – are interdependent. Such forces only exist in relation to each other, and each in turn gives rise to the other. In an investment context, this means the success of a strategy also sows the seeds of its decline.

“Growth managers think they’re going to outperform by picking the fastest-growing stocks. That works until people aren’t as disciplined and pay too much for companies.” Once known, successful investment strategies can breed their own mediocrity by attracting imitators who arbitrage away the original opportunities, or by attracting too much capital. To achieve further success, investment methods and ideas must evolve. “You need to be conscious of what a manager’s competitive advantage is, and what sustains that competitive advantage,” Hartley says. “And if that starts to disappear, you need to recognise that and take effective action. While the questioning of active strategies during the crisis was warranted, any radical overhaul or dismissal of any style that has performed well over cycles is not justified. “The GFC has been an unusual one-in-100-year event,” Marshman says. “We do not think that investors should shape their future investment strategies purely on the events of the past three years.” Marshman says JANA clients have benefited from their active equity mandates since June 2007.

The strategies have beaten passive benchmarks. However, since the period has been “highly volatile” in its delivery of alpha, an understanding of the strategies and the resolve to see them through is needed. Throughout the decade, JANA has advised clients to actively allocate to equities at levels of between 45 per cent and 75 per cent of total portfolios. Funds which implemented these views benefited from the exposures, Marshman says. “However, the path has not been smooth.” “Much of the performance of individual stocks is due to market sentiment rather than fundamentals of company earnings. In the long run, it is the fundamental earnings that determine the returns for investors, but market sentiment can deviate from the fundamentals significantly in terms of both quantum and time period.” Today, the consultant is neutral towards the asset class, and reasons that a 50-to-55 per cent allocation, encompassing Australian and global equities, is appropriate.