Ryan Hughes, head of active portfolios at AJ Bell tells us why they're in favour of active and passive, not active versus passive
'As the head of active portfolios at AJ Bell, I like to champion the case for active managers wherever possible. But equally, having researched investments for over 20 years, I’m now wise enough to accept that there are certain times when active management may not be the best option for my portfolios.
Having just completed the annual review of our long term asset allocation powering the AJ Bell MPS range, we have looked to add a number of investments to increase the diversification of the portfolios and improve the risk/return balance. The outcome of this review has seen the addition of short-dated US Treasuries and US corporate bonds to our fixed interest allocation.
The beauty of the AJ Bell platform is the ability to invest in just about anything that is tradeable. This gives us a very wide range of investment options when we are looking to implement an investment decision in our portfolios. However, despite my job title, I have a mantra that underpins each implementation decision that I make, that is, ‘my first job is to provide beta, and my second job is to try and find alpha’.
Using this approach sets a high bar when deciding whether the investment decision should be implemented actively or passively. If I can find cheap beta to gain exposure to an asset, then I know my hurdle rate for investing in an active manager, where clearly I need conviction that this manager can outperform after fees. While this sounds obvious, it’s always surprising just how many portfolios we see that are totally active in their structure.
For the two fixed interest allocations mentioned, I have the option of using ETFs to gain exposure for just 6bps for short-dated US Treasuries and 25bps for US corporate bonds (GBP hedged).
With the cost of beta coming down, these two examples set a very clear bar that makes it difficult to justify using an active manager. And as a result, our active portfolios have gained exposure to both of these via the passive ETF route with the Invesco US Treasury one-to-three year and iShares US Corporate Bond ETFs being added to the portfolios in February.
We also made some changes to our equity allocations having concluded that the addition of sector specific strategies would improve the overall efficiency of the portfolios.
Having already had an allocation to global technology for the past year, where we have used the excellent Polar Capital Global Technology fund, managed by Nick Evans (pictured), this time we have added dedicated healthcare and consumer staples allocations, both of which bring additional diversification to the portfolios.
Here the same decision process was gone through and while there are a number of actively managed healthcare options available to us, we have not yet gained sufficient conviction to go down the active route. As a result, the Xtrackers MSCI USA Healthcare ETF has been used with the cost coming in at just 12bps. We will continue our active research in this area though, and may look to use an active manager at some point in the future.
On the consumer staples allocation, there are no dedicated active managers in this area but there are managers who have very similar characteristics to consumer staples.
Having looked at the options, our analysis showed that the Evenlode Global Income fund has a strong correlation to consumer staples but improves the diversification benefits even further. Our judgement is that the additional fees on this occasion are worth paying for and therefore this fund has been added to the portfolios.
As the industry spends so much time fixating on whether it should be active or passive that wins out, I much prefer to take the pragmatic approach and judge each investment decision on its merits. As a result, despite being an active investor for all of my career, there is plenty of room for passive investments in our portfolios. After all, why waste our investor’s hard-earned money on fees for managers where we do not have full conviction. Next time you review your active managers, ask yourself genuinely and honestly that very same question.'