Active investing: why now?

Max Anderl, Head of Concentrated Alpha Equity, explains the important role for stock pickers in a world fundamentally transformed by the pandemic and why, even after the tech rally, he still sees attractive risk vs. reward in selected names

09 out 2020

Amid rising uncertainty with second waves of COVID emerging and new lockdowns, why is now a good time for investors to consider an active approach to investing?

With an average c.60 stocks and targeting an active share of 85-90% over the long term, the Global Equity Concentrated Alpha strategy has been beneficial to investors in a number of ways. Our active approach to investing means that the portfolio has the:

  • Potential to deliver above benchmark returns: Since inception of the strategy in September 2007, we have outperformed the MSCI World at a volatility in line with the index (or a passively managed ETF) but with lower downside volatility. The strategy has also consistently demonstrated the ability to both participate in up markets and protect capital in down markets.
  • Efficient capital allocation: Capitalist financial markets aim to allocate limited resources in the most efficient way for society's benefit. The equity market is driven by the views of a large pool of investors. Its aim is to allocate capital to growing companies that are able to keep up with the changing needs of customers. Creative destruction is a cruel but necessary process: letting companies fail in order to free up capacity (workers, capital and assets) for better use. None of these would be possible in a market where the majority of investors are passive, which gives rise to the free-rider problem and inefficient markets.
  • More meaningful ESG integration: Simply applying positive or negative screens on securities based exclusively on quantitative ESG scores from one data provider does not strike us as a particularly sophisticated way of ESG investing. Relying just on scores is not sustainable not least because oftentimes the data quality is questionable and the scores are not reliable. Instead, for us, while ESG scores are a good starting point, they are not the 'be-all and end-all'. As active investors, we assess the material ESG risks of companies on a case-by-case basis. If we disagree with the scores or would like further analysis carried out on a company, this is where the benefits of a dedicated team of 20 Sustainable Investing (SI) experts are really felt. We take it a step further by getting the SI analysts to conduct the necessary due diligence. Depending on the outcome we will then decide what to do with a stock.
  • More effective engagements: Compared to active investors, passive investors have fewer incentives to engage with companies due to the sheer number of index constituents, which contributes to the free-rider problem. Passive managers also face costs pressure and therefore are incentivised to limit spending.

We have seen the market dominance of big tech stocks in the past 6 months but also the recent decline more recently, is there still value in the sector?

Since mid-2015, the big tech stocks (FAAANM* represented by the yellow line chart) have outperformed the NASDAQ index (in brown). Looking at the chart below, this trend may appear similar to what we saw in the 1990s (in red). However, we are not yet able to say for certain that we are indeed experiencing the same situation or that we are heading into an internet bubble. (*FAAANM: Facebook, Apple, Amazon, Alphabet, Netflix and Microsoft)

NASDAQ in the 1990s vs now

Trend showing the rising valuations of technology sector in the run up to the tech bubble and how technology stocks have performed in the last five years in comparison

The tech sector is much cheaper now than it was two decades ago during the TMT bubble. The overall sentiment has also become much more cautious, as consensus forecasts for long term EPS growth is now less than half of the peak seen in the late 1990s.

IT sector cyclically adjusted price-to-earnings (CAPE)

The technology sector is much cheaper now than two decades ago during The technology bubble.

Long term consensus EPS growth forecast*

A long term consensus earnings per share growth forecast for the technology sector and the S&P 500 excluding technology stocks

Markets have moved on from current valuations to 2021 forward P/E. Within the tech sector we find attractive risk vs. reward names particularly in the 'long term winners' of this world, such as Microsoft, Adobe and Mastercard. These companies are well positioned to benefit from the long term structural growth trends, including the shift from offline to online and from cash to cashless payments. They have simply enjoyed the accelerated benefits from remote working trends.

Concentrated Alpha Equities

Combining high active share with an integrated ESG approach

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