Paul Mumford, Cavendish Asset Management

The time for a passive approach to investment is long passed

Paul Mumford (pictured), Senior Investment Manager of Cavendish Asset Management (CAM), the specialist long only active equity fund manager, believes that now is the time for investors to consider taking a more positive approach to equity investing…

I was quite amazed to recently read in various national newspapers and IFA investment publications that advisers believe that in the current stockmarket climate that passive investment is the way forward and that some fund management houses are even launching cautious funds. Why, when for the past three years the FTSE100 has in effect been ‘range bound’ moving between the 5,000 and 6,000 levels?
 
There is now talk from many differing sources including companies, business organisations and economists, of green shoots in recovery and while there may be an element of two steps forward and one back while the recovery takes place, equally there is a belief amongst some of the investment community that the bear market is coming to a close and that the UK and other stockmarkets are entering a bull phase.
 
Advisers and investors take a look at the past with a view to them learning from the dangers of being too passive.

The outright peak of the FTSE100 in December 1999 was 6,930 with the next highest level being in October 2007 at 6,721.
 
If a person was a passive investor over this period of time then all this means is that as of now, depending upon the timing of their investment their money has achieved very little at best or been reduced in value at worst. And contrary to popular perception, Index based investing is actually more risky than it seems.

Looking at Vodafone, BP, Glaxo, HSBC and Royal Dutch these five companies account for more than 33% of the FTSE100 market capitalisation. Indeed going back to the December 1999 peak the value of BT then accounted for 7% of the FTSE 100 Index falling to 1.7% at the October 2007 peak and is now 1.3%. So compared to an active portfolio of say 70 stocks each accounting for no more than about 2% of the fund, it is not difficult to see that there is considerably more risk in the Index approach.
 
For those investors whose money was invested in pensions, this is not good news and there is worse. In the past ten years, annuity rates have halved from 10% to 5%.

Looking at the FTSE100 on 31 December 1999 it stood at 6,930.2 and on 1 October 2012 5,827.79. By comparison Cavendish’s Opportunities Fund on 31 December 1999 stood at 334.2p per unit and on 1 October 2012, 744.2p per unit - by employing an active management equity approach.

While not advocating that investors should seek to make up for the non-performance events of the past decade or more by increasing their risk, and looking at the above facts that is moot point, I question why advisers continue to be erring on the side of “caution” and sticking with an investment approach that hasn’t delivered.
 
By investing in ‘undervalued’ stocks, and having a truly diversified portfolio where a group of shares do not dominate, it could be argued that this is actually a cautious approach on the basis that the share price has much more upside than downside?
 
In my view one thing is sure and that is that investing in indexed funds or closet indexed funds is not actually cautious, it just sounds it, but it is passive.

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