Rathbones’ head of multi-asset investments David Coombs has come out firmly against passive investment describing it as a ‘blunt tool’ and ‘riskier than active'.
Citywire AAA-rated Coombs (pictured), who also runs the Rathbone Multi-Asset Portfolio funds, argues that passives have enjoyed an easy ride since the financial crisis, as broad political consensus and ‘easy’ quantitative easing (QE) money has created highly correlated markets.
‘But the tables are turning towards active management again. Why? Well, the events of 2016 have changed the investment environment for the next decade or more.’
The Brexit vote, Donald Trump's victory and further polarisation of the UK political parties have shown that the 'period of political harmony' has come to a close.
This will create new challenges for markets. Coombs also predicts this will be an interesting time as emerging demographic trends and disruptive technologies begin in earnest to shift the landscape.
‘How can you overcome the intricacies of a new world order with a "blunt tool" passive investment vehicle?'
A dangerous myth
‘There is also a dangerous myth, which has arisen in recent years, that passive investing is low risk, and inherently lower risk than active investing.
'In my view this is untrue: in some instances, passive investing can be riskier than active.’
Higher benchmark risk leave investors wide-open to valuation risk and the risk of investing in companies that may fall victim to technological change, he adds.
‘Further, we view passive allocation strategies that are dominated by fixed income or fixed income-like classes with caution.
'The long-term potential returns from UK gilts are no longer attractive, which begs the question are they the best choice for decreasing portfolio risk? We think not.’
Active’s arbitrary constraints
‘An obsession with charges has led to an ambush of the active management industry and an unnerving faith in passive investment,’ he said.
Part of this ambush of the active industry, for Coombs, are arbitrary constraints on managers, noteably the industry standard three-year track record.
‘As an industry, we should be asking whether three years is too short to allow a manager’s conviction to play out.
‘We have simply come to accept three years as the standard time frame to measure performance, but is this right or arbitrary? Does it actually restrict a manager’s ability to take sufficient risk to achieve superior returns?’
Coombs also questioned the relevance of the ‘growth’ or ‘value’ labels on funds.