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Viewpoint: is your active manager really active?

12 October 2017

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Is your active manager really active?

The FCA’s market study into whether the asset management industry delivers value for money for investors has piled growing pressure on active managers to prove their worth[1]. A key criticism has been the regulator's lack of action against asset managers who overcharge investors by selling funds that promise stockpicking expertise but in reality, only mirror an index. An estimated £109 billion of investors’ money is suspected to be held in these ‘closet trackers’[1].

The rise of closet trackers is unsurprising - managers are typically paid a fee based on their AUM which they want to grow as quickly as possible to increase profitability. Large funds are harder to manage than small funds because they are less agile and need to invest in larger companies to avoid overexposure to one business. Investing in the largest companies, which by their scale represent a significant proportion of the market, means the largest funds become a very close approximation to the market and therefore provide very similar performance. The key consideration for investors is to identify good, genuinely active managers and avoid closet trackers.


Active management metrics

‘Active share’[2], a measurement of how the manager’s portfolio and weightings differ from the benchmark, is a useful metric when measuring how active a manager really is. High active share indicates minimal crossover with the benchmark, while funds with active share of less than 60% can be identified as potential closet trackers. However, individual funds are not required to disclose active share, making it challenging to make meaningful comparisons between funds.

Another metric that can be used is ‘R-squared’ (R2), which measures the percentage of a fund’s movement that is attributable to fluctuations in its benchmark index – the higher the percentage, the higher the correlation to the benchmark. The chart below demonstrates that there is a clear relationship between a low R2 and relative returns compared to the market. On average, only funds measuring the lowest R2 were able to outperform the market.

Source: FE Analytics as at 31/8/17

Within the UK Equity Income sector, examples of funds scoring over 90% R2 include BlackRock Income (£412 million)[3], ArtemisIncome (£6,440 million)[4] and Barclays UK Equity Income (£160 million)[5] – investors in these funds cannot hope to outperform the benchmark and therefore should not be paying active fees. In contrast, a relative minnow in the sector, Downing Monthly Income (£18 million[6]) boasts an active share of 99.3%[7], an R2 of 40% and a relative return of 7.24%[8].


Truly active – how small can be beautiful

Investors should demand and deserve value for money – if they are paying active fees, they deserve active management. We believe that top-quality, truly active managers will prosper during the next phase of the market cycle. Consolidation in the industry will continue and the resulting investment giants will find it more challenging to maintain their performance record and justify their active management charges. This provides the perfect platform for smaller, boutique houses to demonstrate active, market-beating performance, delivering real value for investors.


James Lynch

Fund Manager, MI Downing Monthly Income Fund


Important notice: this is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. An investment should only be made based on the product literature or Prospectus. We recommend investors seek professional advice before deciding to invest. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Downing LLP is authorised and regulated by the Financial Conduct Authority in the UK (Firm Reference No. 545025). Capital is at risk. The value of investments and any income derived from may go down as well as up and investors may not get back the full amount invested. Past performance is not a reliable indicator of future results.


[1] Source: Financial Conduct Authority, Asset Management Market Study MS15/ 2.3, Final Report, June 2017.

[2] A metric introduced in 2006 by professors Martijn Cremers and Antti Petajisto then of the Yale School of Management

[3] Lipper as at 30 June 2017

[4] Lipper as at 30 June 2017

[5] Lipper as at 30 June 2017

[6] Maitland Institutional Services as at 31 August 2017

[7] FE analytics and Downing as at 31 August 2017

[8] Source: FE Analytics for the period 31 August 2016- 31 August 2017.

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Important Notice

Downing’s investments place your capital at risk and you may not get back the full amount invested. Past performance and forecasts are not a reliable guide to future results. Tax treatment may be subject to change and depends on individual circumstances. Smaller company shares are likely to have higher volatility and liquidity risks than other types of main market listed instruments. We recommend that you seek professional independent financial advice before investing. We do not offer investment or tax advice.

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