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'Good active managers justify additional costs’

Stuart Cardozo explains his preference for active managers in uncertain times.

'Good active managers justify additional costs’

Edinburgh-based SWC Independent has tilted its portfolios towards active management in a bid to counter market turbulence. Director Stuart Cardozo said: ‘The value of active managers [could be] even more pronounced in the economic climate to come. There is the possibility of higher volatility and market corrections.’

One way Cardozo has adapted portfolios is simply by replacing passive funds with active equivalents. ‘I think a good active manager will lead to better outcomes. The outperformance justifies the additional cost,’ he said.

In any case, the director is not an exponent of passive. ‘If active and passive were the same price, I’d choose the former because an active fund can return more,’ he explained.

Moved into multi-asset

Cardozo acknowledged academic research showing few active managers outperform consistently after fees. But he said: ‘A bad fund manager doesn’t become so overnight. The reason some funds have so much money in them is because they do well and are consistent.’

The firm has run adapted versions of Rayner Spencer Mills (RSM) model portfolios, constructed to align with Distribution Technology (DT) risk profiles, since 2009. Cardozo said he also adapts the RSM portfolios by reducing the number of funds.

‘They originally had 20 funds in them,’ he said. ‘Explaining this number of funds to a client was time consuming. So I reduced the number to 14 or 15, and increased exposure to other funds in the same sectors or asset classes as the removed funds.’

Cardozo also recently moved into multi-asset and multi-manager funds. ‘I still use the model portfolios, because they’re doing well,’ he said. ‘But I’ve gone more towards multi-asset funds because they’re easier to use.’

Particularly with model portfolios, if a fund manager leaves or a fund is removed, the adviser must alter the model. But first they must write to clients for permission. Cardozo said this had become particularly time consuming since the reporting requirements of Mifid II came into force in January.

Cardozo uses Dynamic Planner and Synaptic Software to research funds and Trustnet to monitor performance. He benchmarks performance against Investment Association sectors. One favourite multi-asset fund range is Premier Liberation. ‘Its funds can be pricey,’ he admitted. ‘But it is backed up with performance.’

Another is the F&C Multi-Manager Lifestyle range. ‘F&C’s multi-manager team has been together for years. It has a process that works, and it delivers,’ said Cardozo.

Favoured funds

Cardozo has used the Standard Life MyFolio range. But he generally avoids MyFolio funds holding the Gars strategy, due to its recent underperformance. Despite his active preference, he also uses the more passive Legal & General Multi-Index funds where appropriate.

One of Cardozo’s most favoured funds in the SWC portfolios is the Amati UK Smaller Companies fund (see chart, below), managed by Citywire AAA-rated team of David Stevenson, Douglas Lawson and Paul Jourdan.

 

 

‘Amati is a boutique fund house in Edinburgh,’ he said. ‘This fund performs well in its peer group, and I get regular access to the manager to hear about ideas and fund positioning.’

Other top-performing funds include the Old Mutual UK Mid Cap fund, managed by Citywire AAA-rated Richard Watts and the Jupiter Strategic Bond fund, managed by Citywire + rated Ariel Bezalel. Cardozo also likes the Baillie Gifford European fund, managed by the Citywire AAA-rated team of Moritz Sitte and Stephen Paice.

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3/13 in Equity - UK Medium Companies (Performance over 3 years) Average Total Return: 17.97%
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30/52 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 8.03%
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3/52 in Equity - UK Smaller Companies (Performance over 3 years) Average Total Return: 57.49%
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8/97 in Equity - Europe Excluding UK (Performance over 3 years) Average Total Return: 40.58%
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