Despite active fund managers underperforming, investors should keep the faith

Investors should not abandon their faith in active management by selling out now. Bailing now will only realise, or lock in, current underperformance. In the worst case scenario active managers will continue to perform poorly for some time to come. Since

While the relative advantages of active fund managers (who regularly restructure funds to take advantage of volatility and inefficient pricing in the market) versus passive managers (who simply track an index that is representative of available investments) is as old as the hills, “there is no doubt that local active managers are going through a cycle of underperformance” says Nina Saad, Head of Portfolio Management, Investment Solutions.

Having gone overweight resources, perhaps too early, due to their attractive valuation underpin, macros continue to work against this position as resources become even cheaper. Looked at over the last ten years, however, SA fund managers, en masse, going overweight resources is an extremely rare event. This means that “active fund managers need to stick to their current positions until the macros change and performance returns” adds Saad.

The million dollar question in all this is, of course, when will the macros change?

Saad believes one of the catalysts will be when foreign active fund managers, who have bought heavily into the emerging market consumer theme, start abandoning their retail positions. When this happens, “a lot of the alpha pent up in current active portfolios will be unlocked” predicts Saad.  The immediate risk, of course, in maintaining current positions is poor relative performance in the short term. This may well prove difficult for the smaller asset management businesses, if investors bail too early. “The larger houses – or businesses that don’t have concentrated client lists dominated by one or two very large clients, however – will do well to
weather the storm and stay the course” says Saad.