The fact that most active investors do not succeed in beating the market does not mean that the market cannot be beaten. “It is not that complicated at all,” said alpha investor Jens Peers, CEO and CIO at Mirova Asset Management, part of the Natixis group.
Of all actively managed investment funds, some 85%, after expenses, perform worse than the market. It’s a statistic that fuels the eternal debate between active and passive investors.
Even in 2021, fully in line with historical “performance”, only one in five active fund managers investing in large US listed companies beat the S&P 500, according to the S&P Indices versus Active scorecard, known as Spiva, which tracks the performance of actively managed funds against their respective benchmarks.
Active stock pickers systematically struggle to match, let alone outperform, low-cost index trackers that track equity markets at negligible cost. Yet a handful of fund managers manage to prove their raison d’être over and over again.
Take for example the managers of the Mirova Global Sustainable Equity fund, with 4.9 billion dollars in assets and an all-in fee of 1.5 percent. They beat the MSCI World Index by an average of 12.4 percent over the past five years.
‘Benchmark huggers’ don’t look ahead
Since its inception in 2013, Mirova’s Global Sustainable Equity Fund has beaten the MSCI World Index, also the fund’s benchmark, by an average of 11 percent a year. This has been achieved without taking significantly more risk.
According to Jens Peers, who grew up in Belgium and has managed the fund from Boston since 2016, his fellow competitors are making a number of crucial mistakes.
“The first mistake investors make is taking an index as a starting point for portfolio construction,” he told Investment Officer.
Many of his active peers are “benchmark huggers”, he said. The index represents the historical success of a limited number of companies, said Peers. The chance that those companies can repeat that trick in the future is simply small, he said.
“The future will look different from the past, and that it is unpredictable. An active manager would therefore do better to look for the new winners in the long term, without being afraid of underperformance in the near future”, Peers said.
“I was trained for this profession in continental Europe. I have noticed that in Europe a fear of not underperforming dominates. That same fear drives investors to make the wrong choices. In the Anglo-Saxon world, it is the other way round; here, there is great pressure to outperform. That is an important cultural difference.”
Long-term themes easy to identify
Obvious global long-term trends and themes are a much wiser starting point, he said, as these themes are easy to identify. “The trick is then to create an investment universe with companies that devise solutions for the problems created by these trends. So far, nothing new, but still many active investors fail to systematically profit from them.”
Peers: “We will inevitably face an ageing population in large parts of the world, and the demographic composition of the population will also change. Climate change has also been proven beyond doubt. It is up to the investor to look for the companies that offer solutions for the problems that this will cause, such as food shortages, for example.”
Together with his team Peers looks at how companies relate to environmental issues and social developments. Too often, however, active investors make the mistake of deviating from what is, in many cases, a good investment process in order to - under pressure from the client - overcome unpleasant market conditions in the short term, he said.
Formula for outperformance
Once the themes and the appropriate universe are identified, most of the work is done, he said. “Within our own universe, we then look for companies that have a healthy management structure. A diverse management with a good mix of professional expertise is key. On average, a mixed management team performs better than a white, male team. As an investor, you also want to know whether the bonus structure is focused on long-term value creation.”
His team also considers how companies relate to environmental issues and social developments. A good ESG profile, he said, ensures better returns in the long term, but it can also entail major risks if not properly addressed.
“Because we think carbon emissions will eventually be priced in, we want to have a portfolio that represents an economy that manages to limit global warming to two degrees,” he said.
The third important parameter is the price of the stock with the expected investments and earnings. “We determine the intrinsic value of the share and then invest in companies that quote at least 20 percent below that intrinsic value. We are generally relatively cautious in our predictions and never keep a share in the portfolio with a price above the intrinsic value we determine. This valuation discipline is very important for long-term outperformance. Traditional deep value stocks - the cheapest stocks in an investment universe - are less or not at all in our portfolio.”
The sweet spot
Although it does not guide Mirova’s investment strategy, short-term changes are factored into decisions. For investors who can handle and dare to use short-term volatility, Peers said, there are great opportunities in the current market. Rising interest rates, for example, have had a negative effect on the valuations of shares that have good market positions and good forecasts. As an example, Peers mentions the Dutch company Adyen, but he also believes that Visa and Mastercard are attractive investments at the moment.
Within renewable energy, Ørsted is a good company to invest in, said Peers. “The former oil and gas company transformed its entire business model in 2016 to become the largest developer of offshore wind farms that it is today.”
This article originally appeared in Dutch on InvestmentOfficer.nl.
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