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How much can active managers positively skew returns?

26/10/2016 … Author:

A recent piece of analysis by research company FE regarding how much active managers can skew returns in negative and positive markets has shown that actually very few of them do so. So why are we using active managers, you might ask?

First let’s take a look at the research. This analysed UK equity investments (funds invested in stocks and shares) and sterling corporate bond funds, which had a 10-year track record, filtering them to ensure it looked at only truly active funds. It then compared performance against the index in times of positive and negative movements.

What it was looking to prove was whether active management could help a fund suffer less extreme losses than the market in bad periods. This was on the basis that investors generally put greater value on a fund manager that reduces their losses in falling markets than one that aims to shoot the lights out – potentially only to lose them an equivalent amount the following year.

The research found that on average having an active manager running a fund did not necessarily mean that when the stockmarket fell the fund would fare better.
But it did find that a proportion in the sample of 62 funds that it used had, what it termed, “superior characteristics”.

The bottom line, as concluded by the research, is that putting money into any old fund is not going to work, you need someone picking the minority of fund managers that consistently have been able to skew their funds to do better in both positive and negative markets.

At Lowes, we have a dedicated research team that not only monitors and analyses the markets but talks to fund managers and really digs down into their funds, assessing the ethos, the structure, the fund manager’s support team, the performance and how consistent that performance has been. We don’t have knee jerk reactions when markets get tough, We’ve stayed loyal to some fund managers going through a rough patch due to changes in the market, because from analysis of their long-term performance, coupled with our conversations with them, we are confident they will deliver more times than not, all of which leads to long-term performance for our clients.

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