The Chase for Quality
Global share markets have experienced years of structural tailwinds, benefiting active and passive fund managers alike. But if these tailwinds begin to abate, which we think is likely, it’s important to understand why active managers like Montgomery are better positioned to deliver returns to clients than passive managers.
Passive funds are managed in accordance to a benchmark, which means that fund inflows are invested based on relative weights of an index rather than company fundamentals.
This means that over the short term, lower quality companies are inordinately supported, which limits the funding available for higher quality companies.
For passive fund managers, having a view means taking a slight deviation from benchmark weights. So overweighting Commonwealth Bank by 50 basis points and underweighting NAB by 50 basis points against the market is a big deal.
By contrast, as active fund managers, Montgomery only invests based on the fundamentals of a business rather than its position in an index. What’s more, the funds have discretion to move to cash when the share market appears expensive. This means that unlike passive managers, the Montgomery funds can take concentrated positions in high quality businesses.
Passive fund managers will always be chasing quality, rather than racing towards quality. So should the structural tailwinds abate while investors continue demanding high returns from their managers, the passive managers must wait for the starting gun to fire, while Montgomery is running its own race.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Michael
:
Hi Ben. Are you still thinking IMF is a good company to invest in? Understand you don’t have a crystal ball.
Ben MacNevin
:
Hello Michael. The thesis hasn’t changed since our article in April – http://rogermontgomery.com/undervalued-and-poised-for-growth-2/
This is only our view though and shouldn’t be relied on for individual investment.
Rob Lyseca
:
Ben, as Charlie would say, you are exactly wrong. I suggest you listen to the Berkshire 2016 AGM.
Ben MacNevin
:
Hi Rob. We do note the Berkshire commentary in support of index investing. However, we also note the phenomenal wealth Berkshire has created by investing actively.