Investment market recovery likely to be slow but active management is needed to move forward, experts say

Written by Ray Clancy

Wednesday, 19 May 2010 08:31

Actions taken over the last year have averted a depression but investors should not expect a return to pre-crisis market euphoria, it is claimed.

As the recent recession was far from normal, any recovery is unlikely to match previous patterns. Headwinds such as tougher regulation, tighter monetary policy and lower levels of credit will persist, but in such a testing environment that active managers are best placed to outperform, according to Robert Talbut, Chief Investment Officer of specialist financial services provider Royal London Asset Management (RLAM).

Passive investment strategies are unlikely to be able to tackle bond market volatility that has been created by economic uncertainty, ongoing default risk and changing supply and demand dynamics, said his colleague Jonathan Platt, Head of Fixed Interest. By contrast, managers with the experience and skill to express their core investment philosophy through a high conviction, active approach are well placed to exploit this volatility to the benefit of their clients over the medium term, he added.

Platt believes that financial bonds, asset backed securities and unrated bonds are future sources of added value within diversified portfolios and the rise of short termism within portfolio measurement and manager incentivisation is not necessarily a good thing. Speaking at the latest keynote briefing session for clients, he called for a reversion to longer term horizons to deliver stronger, less volatile returns.

The event also provided a platform for RLAM to showcase its award winning expertise across other asset classes, with breakout sessions covering equities, property and government bonds, hosted by RLAM’s fund managers.

Fund managers Kevin Lilley and Derek Mitchell revealed that when picking stocks they look for companies which are effectively employing the cash generated during the downturn and which benefit from strong international exposure. As active managers, they are able to identify and exploit where such opportunities lie, citing Melrose PLC, a global manufacturing conglomerate that has increased margins by 20% through permanent overhead reductions and Faurecia, a global leader in automotive components, which has reduced its break even point by 18% through its cost cutting measures.

On property, Stephen Elliott and Gareth Dickinson highlighted the consistency of income return and property’s favourable long term performance compared to other asset classes.
Going forward, they believe that rental growth will remain soft in most markets and that the development pipeline will be muted with very few speculative starts. The yield gap between prime and secondary properties is unlikely to close and, in light of the current economic climate, the team's focus will remain set on prime opportunities.

The record level of outstanding bank lending to UK real estate was identified as a key element of the market. Dickinson believes that the banks will continue to work out their current portfolios rather than dump stock on the market and that this will provide opportunities for the investor who has a proven track record and the equity to invest. They concluded that there continue to be opportunities for active investors but timing and the ability to act quickly will be critical to take maximum advantage of the current market.

Active managers can add value to a client’s bond portfolio through successfully harnessing a number of key tools such as focusing on both the macro (yield curve and duration) and micro sources of performance (cross-market, break-evens and stock selection), according to fixed income managers Craig Inches and George Henderson. Among the examples cited, they noted the advantage of being able to trade around debt auctions, enabling them to make incremental gains, an opportunity not open to passive investors.