Interview with Julian Morrison by Richard Holdcroft
Passive investing is a fashionable topic these days. Publications aimed at investors are full of articles on exchange traded funds, ‘smart beta’ and DIY low-cost investing strategies.
But fashions have a tendency to come and go and leave us looking back a few years down the line, scratching our heads and wondering, “what were we thinking?”
ETFs (funds traded on stock exchanges that passively track assets or an index up and down) have seen huge inflows in recent years.
Julian Morrison, key account manager of investment house Allan Gray, says there are several reasons for this.
For one thing, managing such funds requires no thought and can be automated. This means their fees are lower than those of the actively managed funds with which they compete for investors.
“Another factor that has led to the current interest in passive investing is the poor performance of some active fund managers,” he says.
“Every year we see another report comparing active managers, and showing that 70-80 per cent have underperformed the market after fees.
“The conclusion some people draw from this is that it is not worth trying to invest actively.”
How do so many professional (and well-paid) fund managers get it so wrong?
“Most big active managers are invested close to their benchmarks because they are scared to deviate too much from the crowd, so it’s no wonder they under-perform after fees,” says Julian.
“But with a little effort, investors interested in a better-than-average outcome can narrow down their search considerably to more ‘active’ active managers.”
Passive or active, what an investor really wants is out-performance over time after fees, and this is what Allan Gray’s contrarian, long-term investment philosophy aims to deliver.
Their track record extends over the 40 years they have been operating in South Africa, the 25 years they have run multinational funds (through the Orbis Gtroup), and the almost 10 years they have managed an Australia equities fund.
However, it is important to realise a long-term investment approach does not guarantee positive returns on an annual basis, says Julian.
At a time when blue chip, high-yield defensive stocks such as banks, healthcare and utilities are the market darlings of the Australian index, and commodities are out of favour, the two largest holdings of Allan Gray’s Australia Equity Fund are oil and gas producer Woodside Petroleum and gold producer Newcrest Mining.
Such a contrarian investment approach requires courage of conviction and patience. In return, it delivers the ability to outperform the market in the long-term.
Before opting for a passive investment like an ETF, investors need to ask themselves this question, says Julian.
“Am I content with an average investment outcome, because I am happy to forgo the potential for better-than-average returns in return for avoiding the risk of lower-than-average returns?”
At the end of the day, blindly following a market index is nothing less than a gamble. It would have paid off spectacularly for anyone investing in 1974, 1982, 1991 or 2008, when sentiment was dreadful, but would have proved a blunder during the euphoria of 1970, 1987 or 2007.
“When actively investing as a contrarian, you don’t have to try to time the market,” says Julian. “We look for stocks that are experiencing their own 1974.”
ETFs are not the only passive investment approach enjoying a day in the sun. Low-cost DIY strategies (such as simply investing in the top 10 stocks on the ASX, which make up half the market) offer the promise of fee-free investing. So-called smart beta attempts to combine the best of passive and active investment strategies.
But investors should think carefully and consciously about their investment beliefs before buying into the latest popular trend.
“History is littered with examples where popular investment ideas looked most enticing on the eve of being exposed as the latest emperor’s new clothing,” says Julian.
In contrast, Allan Gray’s reliance on contrarian philosophy, long-term vision and emphasis on the importance of underlying business fundamentals offers a way to achieve market-beating returns, in the long run.
Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.