The current market downturn is likely to expose ‘active’ managers that are too closely aligned to the index, with HFA Asset Management chief investment strategist Jonathan Pain warning of the risks for those invested in such funds.
Pain predicts that in the years ahead “we shall finally see the great portfolio debate resolved”.
This would result in the emergence of managers who are truly active, or truly passive, Pain said, rather than the current trend for managers that are neither really one nor the other.
“There is absolutely no conceptual case for an approach that is neither active nor passive,” he said.
Pain believes many of these funds masquerade as being active, “whilst hugging an index and hiding behind tracking error as a measure of portfolio risk”.
“Moving forward, can we please use the terms ‘active’ and ‘passive’,” Pain said.
“And then finally we can make some headway and illuminate the reality that a fund that derives approximately 95 per cent of its performance from the market can surely not be described as ‘active’.”
On other matters, Pain said that with house prices in some US regional areas having now fallen by nearly 50 per cent, the bottom might be not far away. But in countries such as Britain, “there is much more housing pain to come”.
Moreover, “here in Australia we are seeing widespread evidence of sharp declines in prices”.
Pain said his forecast of a 25 per cent decline in Australian house prices, made at the beginning of this year, “will prove to be very conservative”.
Regarding growth in the Chinese economy, Pain has predicted growth of 6-7 per cent for next year. But he does see some recovery in the global economy, “possibly in the second half of 2009”, led by Asia and the results of “the mother of all stimuli”.
