A new ratings methodology is attempting to illustrate where active management can reward investors over a tracker fund.
Active Payback, developed by Albemarle Street Partners, will show instances where active management beats not just an index or benchmark, but an equivalent passive investment when all costs are taken into account.
The results will be presented as a figure for the additional money investors have earned for every pound they have invested actively. Five year cumulative performance of the main share classes are used to create an asset-weighted performance figure in each sector.
Burton and Fisher IFA Michael Burton says: “The most important thing for us as IFAs is to make sure that clients are only paying active fees in areas where we believe it can add real value for them. We welcome anything that helps shed light on how to make the decision of when to invest actively or passively backed by strong facts.”
Money Marketing will be partnering with Albemarle on a new category in the Money Marketing Awards this year: Best Active Manager. The shortlist will be comprised of those managers who can illustrate their outperformance over and above their passive peers.
An independent judging panel will then grill the managers on elements like strength of style and research, preparations for market volatility, action on costs, transparency and ESG factors, as well as ensuring advisers and end clients receive the highest level of service.
Money Marketing will also be providing advisers with regular updates on how top managers are performing under the new ratings throughout 2020.
Albemarle managing director Charlie Parker says: “Professional advisers face a daily challenge to control clients costs whilst also giving them access to the investment opportunities that can enable them to reach their goals. One key aspect of this is the decision about what portion of a portfolio should be invested passively or actively.
“That debate though has become stale. Whilst some reach a binary conclusion for most it is a case of properly blending the two approaches in an evidence-based way. Active Payback aims to give these advisers a new tool to achieve this. It enables advisers to see how much more they are paying for an active fund than its specific passive equivalent. More than that, it allows them to show their investors in pounds and pence how much value their active fund selection, or that of their investment partner, has delivered for them.
“We are excited to partner with Money Marketing on this project because it enables our analysis to reach a wide audience of professional advisers who share the same challenge.”
The groups in charge
The ratings system is also changing how performance at group level is calculated. Active Payback will look at how a group has done overall, and show the additional returns investors have made in pounds and pence on average by choosing a particular fund group, rather than just highlighting star funds or ones that are receiving the most attention.
Parker says: “As well as looking at the specific funds delivering a high Active Payback we have worked hard to see what Active Payback fund management firms as a whole have delivered for all their investors – not just those invested in the best-performing funds that attract marketing spend.
“We believe this equips investors to judge the overall effectiveness of fund groups as well as understanding how performance and cost work together to produce a result.”
The fund group results are split by size: large firms that operate in all of the nine sectors analysed, medium ones that operate in between five and seven, small ones that operate in two to four, and boutiques only operating in one.
Baillie Gifford tops the large sector with an active payback of 41p. Marlborough tops the medium one with a 60p active payback, while Lindsell Train leads the small category at 69p and Fundsmith the boutique one at 75p.