This week we will be running an interview with Investec’s self confessed contrarian Alastair Mundy.
Now I do not want to steal the thunder of that interview but I do want to focus on what Alastair’s comments tell us about the existing fund management model. I would suggest that if active fund managers are to beat back the menace of index tracking passive funds they have got to actually be more...well... active and god forbid, contrarian. If the mainstream is to beat back all those boring passive types it is going to need a massive injection of testosterone and self belief, neither of which I would suggest is about to remotely happen if Alastair’s views are right!
Lets step back for one minute and examine the contention of many advisers that an active fund manager is worth the extra cost. Lots of smart people like Mark Dampier at Hargreaves Lansdown will tell us that index tracking funds are a fools errand and their emphasis on low costs hides a failure to control risk, get out of expensive stuff early on and focus on dividends.
The logic here is fund manager expertise is all about making a difference. But what is that difference - is it the manager’s ability to generate value through carefully selected trades as I suggested a few weeks back ? Or is the ability to time markets based on key macro-economic turning points and then adjust risk ?
I think the academic evidence for consistently timing risk inflection points is overwhelmingly negative -managers just do not quite get it right!
My own preference is for the former (create value through aggressive stock picking) with a particular emphasis on taking an opposite view to the markets - if I want momentum I buy the FTSE 100, if I want a contrarian view I buy fund managers like Alastair who will manage a tight portfolio of shares aggressively.
But let us be honest here, even Alastair is not as contrarian or as aggressive as he would like to be. In answer to my question of whether it is possible to be a real contrarian in equity markets here is Alastair’s answer.
“Not to sell it to the retail investor! And probably in a way, you can not sell it to the institutional investor because ideally what you would like is to have the capacity to be say 50% in cash if you can not find enough good ideas. ..you do have to perhaps temper the purity of your investment process... we all have to play by certain rules!”
I would suggest the real problem here in the industry is with focus - if we want a contrarian who provides his investors with real alpha, through trading a portfolio, what we actually want is a small, focused portfolio of little more than 20 to 50 stocks.
But we all know this just will not sell.
As Alastair says, once you put that idea in front of a bunch of pension fund trustees, they will think fifteen or twenty stocks is not diversified enough. Whereas the academic world actually suggests the lower number gives you proper diversification.
And you know, Buffett has always said put your eggs in one basket and watch that basket carefully. If you know your Stocks really well then that can reduce the risk.
Q: Do you find yourself looking at your list of holdings and saying to yourself ‘do I leave myself open to Index hugging’ ?
Alastair: Yes!
Q: Do you honestly think you’re true enough to your contrarian beliefs at the moment?
Alastair: I think within the realms of being gainfully employed, yes. Jeremy Grantham calls it career risk. Perhaps everyone would like to do things slightly differently, but you can not run the risk of having to go home and tell the wife you are unemployed. Now, does that mean you have made worse decisions for investors than you would have done? Well not necessarily because your investors, even though they might claim to want your pure process, might not be able to handle it.
That wonderful line from a Few Good Men suddenly jumps to mind - the one where Jack Nicholson tunrs to Tom Cruise, and says “you know, you can’t handle the truth”.
As Alastair says of many retail and institutional investors: “ you give them a pure portfolio with greater volatility and they would complain that you had lost them far too much money”.
I would suggest that we do in fact have a big problem - even though the passive awkward squad keep attacking the citadel of conventional fund management, we still have a strange situation where contrarians can not really be contrarians, and where focused stock picking is regarded as dangerous. Ah, but give us another absolute returns fund or global income fund and we’re all happy!
