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services, eliminating the gains of
those who deliver marginally positive
returns. By the time the client has
paid the costs, the result is often the
same outcome that could have been
achieved without an active manager.
“Our industry has a problem with
charging clients. Not so much
charging too much, but, taking too
high a share of whatever value has
been added,” he points out. “Many
active managers outperform a little
bit, but then essentially take it all
back in fees. You’d be better off with a
passive manager in those instances.”
Studies showing that the average
active manager underperforms
after fees promote the benefits of
passive investing. But this ignores
the substantial returns that can be
generated by an above-average active
manager. It also applies the term
‘active’ to those who charge fees for
managing a portfolio yet stick closely
to the benchmark index – the worst
possible combination of active fees
and virtually passive investing.
“The two strong signifiers of active
management done well are low
turnover and high active share, active
share being the level to which we
differ from an index,” says Dunbar.
“Active share – or divergence from
an index – suggests to me, again,
that these are managers who are not
starting by mechanically looking at
and then culling stocks from the whole
opportunity set. These are managers
who are trying to find great ideas.”
To avoid being caught up in the
active-versus-passive debate, Baillie
Gifford has taken steps to emphasise
the traditional investment process
by applying the label, ‘Actual
Investing’, the alternative to simply
trading in the stock markets.
“It’s quite interesting. We’ve started to
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