Monday, May 11, 2009

Active Fund Management V's Consensus Fund

Are there any Consensus Fund lovers out there that would like to rebut the points made by the Pensions Director of Eagle Star/Zurich in favour of Active Fund Management?

The Z-Cast is available here

In short, he argues that:

a)'Consensus' (follow the herd) has had its day
b) The out performance of some active managers could be the difference between having a solvent and insolvent pension scheme
c) The 'rear view' investment approach does not capture investment opportunities due to a time lag
d) Trustees of pension schemes should reconsider their 'safe' investment decisions
e) Some Actively Managed Funds are not necessarily more volatile than Consensus Funds.

Would be very interested in any views that you may have on this debate.

PS: It's specifically to do with Consensus Funds V' Active Fund Management. Not to be confused with the Active V's Index Tracking debate.

Relevant/Featured Website


gary said...

I think there is some genuine merit in the ‘Consensus has had its day’ argument, but I am not convinced about the proposed alternative. Zurich’s conclusion does not solve the problem faced by pension trustees. Yes, consensus funds were launched to absolve trustees of selection risk (the risk of choosing a manager that underperforms). The future being ‘active’ does not provide the solution to this problem. Zurich would argue that its balanced managed fund is the solution as it has delivered consistent above average returns. The figures in the presentation look fairly persuasive (though are not annualised, so look a lot more dramatic at first sight), but there is even more compelling evidence to the contrary. A comprehensive study done by CRA Rogers Casey in the US found that choosing managers on the basis of past performance is not only a redundant exercise, it is more likely to lead to perverse results (i.e. you would be better off choosing managers with below average performance).

Trustees avoid the adverse selection criticism by going the consensus route. But what about the client who’s perception of risk differs to that of the trustee? A clients perception of risk is that they will lose money, or fail to retire on a sum sufficient to meet their needs, not whether the fund they are invested in only lost 30% in 2008, against the average which lost 35%. It may be a bit below the belt to choose the worst year on record for managed funds to make the last point, but the argument remains, that fund managers, trustees and clients perceptions of risk are not aligned.

I think the debate here is not one of ‘active’ versus consensus. The real debate is; is what the consensus fund is tracking appropriate or not? I would argue it’s not. The future is not Consensus, but neither is it an actively managed balanced fund (not least for reasons that most balanced managed funds are not actively managed). I believe the future is based around:

• A world where we stop obsessing about short term performance – the monthly managed fund surveys should be scrapped.
• A focus on fundamental values with a strategic asset allocation suitable to long term objectives.
• A recognition that while tactical asset allocation (timing markets) may be important, getting it right is next to impossible, hence real diversification should be central to investment strategy.
• A recognition of the inability of active managers to consistently outperform, resulting in wider use of passive vehicles (I am not against genuine active management, but there needs to be compelling evidence of a process which is capable of delivering ‘alpha’).
• A much better appreciation of charges and how they impact on returns. Total expense ratio’s (TER’s) don’t exist here, but I think pressure will come for funds to start providing more information about ‘hidden’ costs.

I have a fund in mind which ticks all of the above boxes, which has received some positive reaction from a trustee of a large pension scheme. The fund is not currently investable, but would hope to progress by the end of Q3. At that point consensus and indeed managed funds will be my target. The future is not Consensus, but neither is it balanced managed funds.

Noel Kelly said...

Brendan Johnston is not saying the future is Active as opposed to Consensus. Instead he is saying that the future is Eagle Star Active as opposed to Consensus.

It is true that Eagle Stars performance has been good but there is no guarantee that that will always be the case. It's also true that Consensus has probably had its day but does that really mean that the asset allocation of Irish Managed Funds has had its day relative say to Managed Funds in other parts of the world and that could lead to a whole other debate which I won't go into - nontheless one would have to drag the Eagle Star Managed Fund into that debate also.

Gerard said...

Hi Gary,

Are we talking about some kind of Absolute Returns Fund? What would the likely TER be on the fund you have in mind?
I presume that there would have to be some form of fund management 'skill' involved in deciding on asset allocation at outset? Would this need to be rebalanced on a regular basis?

No problem if you are not at liberty to divulge as I can understand why you might want to protect any competitive advantage.

Hi Noel,

I think that there is a certain amount of fear by fund managers that the 'value' of their input might not be well received by their pay masters, as there is so much emphasis put on 'performance' relative to peers.

This probably hinders the development of suitable investment vehicles/funds for certain sectors of the market.

Paul said...

Consensus/Managed funds are deeply flawed.The very word "Managed" is a misnomer in that those funds are managed by reference to the peer group.As such they are in the Relative return business whereas most personal pension/DC investpors are (or should be) focussed on Absolute return.

As such I am reluctant to engage with Brendan Johnston,other than to acknowledge that the Eagle Star fund is one of the few funds which is not a closet form of Consensus.However it is still mainly focussed on Relative return.

In terms of Gerard's probing of the likely TER on newer-style offerings,I think we should start by saying that what has gone to the asset management entities ( a small fraction of what the life companies charge) has not produced any value - like Gerard I would always focus on costs it is probably better to focus on value....