RLAM: Brave new world favours active asset management
18 May 2010
Actions taken over the last year have averted a depression but investors should not expect a return to pre-crisis market euphoria, according to Robert Talbut, Chief Investment Officer of Royal London Asset Management (RLAM). Speaking at RLAM’s third annual Keynote Briefing he advised institutional investors and intermediaries that 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 he argued that it is in such testing environments that active managers are best placed to outperform.
Jonathan Platt, RLAM’s Head of Fixed Interest, stated that bond market volatility created by economic uncertainty, ongoing default risk and changing supply and demand dynamics would be poorly addressed by passive investment strategies. 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.
Platt emphasised the inefficiencies inherent in government and particularly credit bond markets, highlighting the role of indices and credit ratings in creating stock selection opportunities for managers who can think outside these usual parameters. He highlighted financial bonds, asset backed securities and unrated bonds as future sources of added value within diversified portfolios. He challenged the rise of short termism within portfolio measurement and manager incentivisation, calling for a reversion to longer term horizons to deliver stronger, less volatile returns.
Victoria Muir, RLAM’s Head of Client Services said,
“Our Keynote Briefing provides an excellent opportunity to focus attention on the real issues driving our investment decisions, talking directly to our clients about the actions we are taking on their behalf. We are in challenging times, but opportunities abound for active managers with the vision and experience to seize them. RLAM offers clients access to just such managers, helping them to exploit market conditions no matter what stage of the economic cycle we are in.”
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.
Equities
Fund managers Kevin Lilley and Derek Mitchell examined the extraordinary measures many companies took when faced with the possibility of a depression and how this translates into opportunities for active investors in today’s post-recessionary climate. The speed with which companies reacted to the economic environment and the extent of the cost cuts they were able to make mean that those companies which survived the credit crisis are now well placed to benefit from more benign conditions.
When picking stocks, both managers revealed that 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.
Property
On property, Stephen Elliott and Gareth Dickinson gave attendees an insight into where they see the opportunities in UK commercial property. They 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. Gareth believed 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.
Government bonds
Fixed income managers Craig Inches and George Henderson highlighted how active managers can add value to a client’s bond portfolio through successfully harnessing a number of key tools. By focusing on both the macro (yield curve and duration) and micro sources of performance (cross-market, break-evens and stock selection), they surmised that active investors could add a significant amount of incremental value to portfolio.
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.
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Editor’s notes
Royal London Asset Management (RLAM) was established in 1988 and specialises in providing investment management solutions for both the Royal London Group and a range of external institutions. These include FTSE 250 companies, local authorities, universities, charities, wealth managers, financial advisers and private clients. RLAM manages over £37bn of assets, employing more than 50 experienced investment professionals in our London based office.
Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value quality propositions, operating through a number of brands:
- Scottish Life – UK pensions market
- Bright Grey – UK protection market
- Scottish Provident – UK protection market
- Royal London 360° – offshore investment markets
- RLAM – fund management
- RLCM – specialist cash and liquidity management for UK onshore clients
- RLAM C.I. – specialist cash and liquidity management for offshore clients
- RLAS – life and pensions administration
- Fundsdirect / Ascentric – funds supermarket; Wrap platform
Royal London also distributes life and pensions products through Santander’s UK branch networks.
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £39.1 billion. Group businesses serve around 3.4 million customers and employ 2,890 people. Figures quoted are as at 31 March 2010.
For further information:
RLAM
Stephen Watchorn
Tel: 020 7506 6582 Stephen.watchorn@rlam.co.uk
Quill PR
Jo Stonier
Tel: 020 7758 2230