Bill Jamieson: The perils of sticking with passive investment

Should private investors stick with a favoured list of fund managers? After the turbulence and traumas that have hit the highly regarded Neil Woodford this year, loyal following can come at a price. Fashions change. Strategies can become outdated. And rare is the fund manager who remains consistently among the top performers decade after decade.

That said, I have ‘favourites’. They are not by any means defined by performance alone. I place store by managers who can set out clearly their investment philosophy and approach to share selection and can make a compelling intellectual case. This can matter more than strict conformity to an investment sector or geographic area. Among my favoured few I would count James Anderson of Scottish Mortgage Trust, Thomas Moore at Standard Life Equity Income Trust, Bruce Jenkyn-Jones at Impax Environmental Markets, and the trio at Personal Assets Trust (PAT) – Robin Angus, Hamish Buchan and Sebastian Lyon. There are others who merit inclusion but these are the ones that I would single out for the quality of their reporting to investors and the information and analysis that accompany interim and full year statements.

There is a trend now not to bother with all of this. Investors would be better off with a ‘passive’ fund .The errors of personal bias can be avoided, investors are automatically kept abreast of changes in market fashion, costs are lower than with an actively managed fund or trust and performance closely mirrors the behaviour of the market as a whole. What’s not to like?

Not for the first time I am indebted to PAT’s Robin Angus for a critical appraisal of so-called ‘passive’ investing. In theory passively tracking an index should result in slightly better than average performance at a below average cost. So why don’t we all become passive investors?

First, while most active investors will underperform the market over the long term, not all do so – as the net asset value of PAT has proved over the 27 year period between 30 April 1990 and end April this year. Second, a passive investor is locked into buying shares in the chosen index which may be fully priced while an active investor is free to avoid them. Third, passive investment does not eliminate risk – for all equity investment is a risk compared with holding cash.

And finally, lower costs may not compensate for loss of performance that can be achieved by active investment management. And in any event, equity investment cannot be reduced to matching a chosen index benchmark: capital protection remains the cardinal priority for those seeking to build a store of capital over a lifetime. Individual circumstances – and the ability to adjust investment preferences in line with these – is a freedom never to be lightly surrendered.

Magic money rain forest

Who dares invest now in an investment trust or mutual fund investing in infrastructure projects? To loud applause Shadow chancellor John McDonnell outlined plans at the Labour Party conference for large-scale nationalisations and pledged to ‘bring existing PFI contracts back in-house’.

Shares in infrastructure investment companies took a hit. John Laing Infrastructure Fund, with 30 per cent of its assets in health contracts, fell 4 per cent. HICL Infrastructure lost 3.5 per cent. Stockbroker Canaccord Genuity said that while the conference speech was high on rhetoric, it was low on detail.

It also noted a subsequent Labour Party press release that ‘Labour will review all contracts and, if necessary, take over any outstanding contracts and bring them back in-house’. “We note Margaret Hodge’s comments… that the Labour party should focus on health, social care and schools rather than taking back existing PFI contracts, purely for ideological reasons which is ‘highly unlikely to save any money due to the huge bill in terminating them’. A sum over the £57 billion capital value given to PFI contracts by the Treasury two years ago looks likely – and analysts say this could rise to more than £100bn given the 25-30 year length of many contracts.

In addition, a large chunk of the funding for PFI deals comes from pension funds. Any removal of these PFI assets would limit their ability to meet their income needs whilst it may also hinder the government’s ability to raise future capital. All this comes on top of commitments to re-nationalise utilities and the Royal Mail and to scrap university tuition fees. Not so much a magic money tree, perhaps, more a South American rain forest?