Future returns may be half what investors used to: Singh

A changing investment environment is likely to blunt investors' returns over the next decade - and give active managers a chance to shine, it has been predicted.

Sunday, March 19th 2017, 8:13PM

by Susan Edmunds

Indy Singh of Fiducian

Michael Haddad, senior portfolio manager at Peters MacGregor, was one of the speakers at last week's Meet the Managers events.

He said what had worked well for advisers and their clients over the past seven years might not work so well over the next seven.

“What has worked is passive investing," he said.

Equities were generally attractively priced five to seven years ago and simply obtaining exposure through low cost index funds was an effective strategy.

"Passive investing became quite popular which led to underperformance by active managers. This reinforced the concept of a passive approach with a powerful feedback loop resulting in what's become the ultimate momentum trade,” he said.

“If interest rates are going up it may put the spotlight on valuations and how richly valued equities have become. It’s a point of concern. The global equity market is very broadly richly valued, there are no wholesale areas of undervaluation so you need to pick your spots. The best companies will be terrible investments if you overpay, and the problem with passive is investors end up doing just this without really appreciating it."

But he said investors could get around that by dealing with high-conviction, active asset managers.

“It's been a challenging broad market environment for active value managers to keep pace with over the last half market cycle. But over the full cycle, strategies like ours are well placed to generate excess returns for clients and with a degree of downside protection in the event of a market downturn."

He said the most important thing was that investors were mindful of what their exposures were, and considered how different their portfolios were from the benchmark they were being measured against. He said that was particularly important when equities looked so fully valued.

Indy Singh, of Fiducian, agreed that the world was changing for investors.

He said recent years had given growth assets and fixed interest a good run because interest rates had fallen. Now they are on an upward track – as signalled by last week’s Federal Reserve move.

That, and a reduction in globalisation, meant the returns that had been seen in equities over recent years were unlikely to be repeated over the next 10, he said.

He predicted returns could be half what investors had become used to.

But he said there were still opportunities in emerging markets, technology and smaller companies.

“In India, household debt to GDP is not even 10% compared to 106% in the US. There’s a great opportunity there."

Tags: Active v Passive