Euro am Sonntag-Standpunkt: A recipe for success for fund managers: only those who can fail can win | message
Indices in this article
by Ralf Lochmüller, guest author of Euro am Sonntag
W.he would have thought so: In the pandemic year of 2020, of all places, some active fund managers, measured against their benchmark index, achieved the best performance since their inception – some were able to break away from him by double digits. You have recognized and used the opportunities: the pronounced volatility, the frequent industry rotation, the quick change of favorites. This allowed them to focus their portfolios more on the winners of the crisis: e-commerce, streaming services, equipment suppliers for the healthcare industry and so on. You can say that it passed the test.
But: not every active manager can say that about himself. This mixed picture encourages a widespread perception among investors: Active managers, many say, are fundamentally not in a position to achieve better returns than the broader market on a long-term average – especially not after costs. Because stock markets are efficient and therefore all information is already included in the prices. This encourages some to only rely on passively investing ETFs that only replicate an index.
In my opinion, however, that is not very effective. Both concepts are justified. You just have to put them in the right place. ETFs make it possible to invest cost-effectively and globally in entire markets. This works best with the leading indices such as the Euro Stoxx 50 or the S&P 500, which contain the largest companies in the respective markets. The pricing in these markets is actually very efficient. It is difficult for active managers to outperform the market in the long term in this environment.
Broad indices only cover part of the overall market
It looks completely different with special topics. Stock market segments such as the European small caps, for example, are characterized, among other things, by the fact that their companies are usually only observed by a handful of analysts. In addition, there is the overwhelming diversity of companies with around 2,000 individual values - there is hardly an industry, a new technology or a trend that cannot be found here. For comparison: the leading European indices only include around 250 values.
The interplay of a large number and little attention results in inefficient pricing for small caps. This means that not all information that is publicly available in itself has to be included in the prices of these stocks. In-depth industry and market knowledge, detailed analyzes, personal company visits and regular discussions with management help to find and evaluate this information. This is where stockpickers with years of experience can make all the difference.
I am convinced that independent fund providers have an advantage here, as they give their fund managers greater freedom and support them with the necessary trust. Fund managers need the freedom to take risk with confident investment decisions. This is the only way to achieve better results in the long term than the market average. However, the risk – the downside of higher returns – also includes weaker phases. Some fund companies therefore consciously or unconsciously suppress the willingness of their portfolio managers to take risks. So they will tend to stick to their benchmark and actually act passively. That’s how they stand supposedly on the safe side and minimize your personal career risk. This is one reason why so many active portfolio managers lag behind their benchmark on cost.
A consensus portfolio only yields consensus returns
In summary, active managers have the best chance of beating the market when they do
– invest in a niche market with their specialist knowledge;
– bring only the best companies into your portfolio and do not orientate yourself closely to their benchmark index;
– have the courage to have a strong, dissenting opinion;
– and they are allowed to implement their convictions in the portfolio. On the other hand, those who only follow the consensus cannot expect more than the consensus return – and that is just the market.
CEO of Lupus alpha
Working in asset management for over 30 years, Lochmüller and four partners founded Lupus alpha in 2000 – an independent, owner-managed fund house for special segments such as European small caps, convertible bonds and volatility. Lupus alpha manages around 13 billion euros for professional and private investors, including two billion euros in public funds.
Image sources: www.reneschiffer.de/Lupus alpha, xxx