Climate change is one of the most important issues facing markets, companies, countries and investors around the world. Major questions also remain unanswered in the post-pandemic context. How about taking this opportunity to identify in which ways active wealth management can be, more than ever, the best approach to drive success?
Anticipation and agility
Active wealth management, opposed to passive (or index) management, recently wasn’t enjoying the favor of the investor’s majority. For example, in 2018, passive investing overtook active investing in the US equity market. Some even speculate that passive investing will overtake active investing overall in the US market thanks to a widening lead in equities and an expansion in fixed income. However, in times of market volatility and uncertainty, investments must be adaptable and resilient if a market disruption occurs. Unlike passive asset managers, active managers can change their allocation quickly and be agile. Often, a comparison in research is made between remaining invested in the market compared to missing out the best trading days of the time interval that is being research. The point then is made that over the long-term, it is better to not time the market but rather remain in the market, as missing out on those best trading days would have an immense negative impact on the portfolio return. That point is absolutely true, as illustrated by research from Bank of America. If an investor would have remained invested in the US equity market over the period 2010-2020, he or she would have gained a return of 190%. If that investor would have missed out on the 10 best trading markets, the return would have been only 95% over the same period. However, we should also look at the other side of the argument. Namely, that if an active investor can correctly time to sit out on the worst trading days, the positive effect on the portfolio return is even greater. In fact, the same Bank of America research shows that over the period 2010-2020, an investor managing to sit out the ten worst trading days, would have gained a stellar return of 351%, significantly above the return of remaining invested in the market over that period (190%). Of course, perfectly timing the market is rather impossible. Hence, the Bank of America research also calculated the return over that ten-year period should the investor have missed out on both the ten best and worst trading days. The result shows that this investor would have gained a return of 203%, above the return of the investor who remained in the market. Hence our point that active management and agility can add value to investors.
Impact on the economy
As an investor, if you are not only focused on the price you pay for your investments, then active management has the advantage to bring real change in companies. Active managers are well placed to hold a permanent dialogue with companies and influence their strategy. For instance, if a company does not progress on defined ESG criteria, the portfolio managers can, as a last resort, reduce their positions or divest entirely. Passive index funds may be locking asset managers into “auto-financing” fossil fuel companies. Moreover, as ETFs replicate an index either physically or virtually, most of them, do not allow investors to vote in general meetings and thus to play a "real" shareholder role. Therefore, if we want to be serious about stopping climate change, we should use active wealth management approaches. Also, on the fixed income side, passive investing can lead to unintended consequences. For example, a fixed income index is often heavily skewed to hold the largest issuers. Often, these are the most debt-burdened companies (i.e., having the most bonds outstanding) of that universe. This is not necessarily something desirable as a fixed income investor.
It is not to say that we at Econopolis do not think passive investment products cannot offer any value to investors. There are certainly some segments were these are good alternatives, perhaps because of administrative reasons or a lack of available active alternatives.
However, active management offers to potentially outperform the “benchmark” and thus “beat the market”. This upside potential is not available for passive investors. Not all active investors of course succeed in their objective, but we believe that we at Econopolis have the right philosophy and tools to do so. Our active investment philosophy is based on three pillars. The first pillar is agility. Our investment team has different backgrounds and sits together. Thanks to our setup, the team is able to swiftly react to changing market circumstances, something that is absolutely necessary given the current turbulent markets. The second pillar of our investment philosophy is conviction. We have a set of long-term investment convictions that are largely based on the six “Econoshocks” from the book from our founder Geert Noels. We believe these long-term trends such as a.o. technology, emerging markets and climate will be key drivers of the performance going forward. The third pillar of our investment philosophy is sustainability. Sustainable investing is our level playing field. Whereas for other large asset managers, sustainable investing has only recently changed from a “nice to have” to a “must have”, sustainable investing has been a core part of our DNA since our launch more than ten years ago.
We are of the believe that markets will remain for the foreseeable future in a “VUCA-state” (Volatile, Uncertain, Complex and Ambiguous). Therefore, we think it is crucial for investors to go a step further than passive investments and apply an active, agile, conviction-driven and sustainable investment strategy that is able to successfully cope with this market.
Portfolio Manager – Fixed Income at Econopolis Wealth Management