The advent of passive equity funds has provoked much debate on management styles, yet the definition of active management has, at best, been left as an undefined, generic term.
Prudential Portfolio Managers director Steve Goldberg says many people who describe their funds as being actively managed are using the term too loosely.
He says there are two clearly defined ways of actively managing money yet these styles are being clouded by the use of many other terms, plus a number of managers aren’t practising what they preach.
These comments are echoed by Colonial Investment Management chief executive officer Bruce Abraham.
His view is that many so-called “active” managers in New Zealand still practice “enhanced index hugging”, where they essentially buy the index and make a few adjustments.
To his way of thinking there are only two truly active equity managers, namely Colonial and BT Funds Management.
Goldberg says active management can be split into two categories, growth and value investing, both of which work in different conditions.
He says all the other terms used to describe management styles, such as top down, bottom-up, contrarian, thematic and quantitative, are merely added descriptors to these two types of investing.
Actively managing a portfolio to a growth style involves calculating a share price based on economic fundamentals, then trying to forecast how that price will change as a company’s markets, product mix and strategy changes.
Under this method a manager is trying to out-forecast the consensus view, Goldberg says.
A value manager is cognisant of these fundamental issues but also includes into the calculation human psychology.
Goldberg says a value manager doesn’t believe in efficient markets as each person treats the same piece of information differently.
“Prices do not always reflect fundamental value in the short term,” he says. Human emotions will impact on a price and that can take a share price away from its fundamental value.
This is often seen when a company reports bad news. In these instances the price will fall below its fundamental value before reverting to a more accurate level.
Goldberg sums the two styles up as forecast versus fact.
He says a growth manager believes the markets are in equilibrium and are efficient, while a value orientated manager says markets get out of balance from time to time and when they do buying opportunities exist.
Prudential Portfolio Managers director Steve Goldberg says many people who describe their funds as being actively managed are using the term too loosely.