“An active manager can take a more granular, subtle approach. He will look for additional factors to add to his model every day.” An active manager is also better suited to deal with the traps involved in factor investing, believes Van Mulligen.
If a low-vol manager simply buys the stocks with the lowest volatility or a quality manager only opts for those names with the most stable earnings and highest return on equity, valuations could become sky high.
“Excluding so-called glamour stocks like Apple or Google could help keeping the average valuations in your portfolio in check,” says Van Mulligen. This is an approach employed by one of the managers he uses in his ‘quality’ bucket, Schroders ISF QEP Global Quality.
Style drift
But there is of course a danger that an active manager becomes too active. “An active manager has to stick to his style,” says Van Mulligen, who sees style drift as a fund selector’s worst nightmare.
Van Mulligen prefers to use at least two managers with a different style for each of the factors. “We work with a total of 10 managers within developed markets equity,” he says. “In global small caps [the size factor, comprising 15% of the total equity portfolio], we use Axa Rosenberg, which takes a bottom-up approach with a value tilt. Their portfolio has 200 names, which is not a lot in global small caps.”
The second manager he uses in this bucket, Dimensional Global Small Caps, takes more of a top-down approach. “Dimensional aims to harvest the risk premium of global small caps by gaining broad exposure to the market.
“However, at the same time they believe the index doesn’t appropriately reflect the market so they have designed their own broad approach, taking thousands of different positions.” For the performance of these funds, see the ‘Achmea IM small-cap choices’ graph.
Van Mulligen’s main reason to opt for managers with a different style is to reduce the volatility of the total portfolio, as different styles each have their ups and downs. But reducing risk is not only about investment process and style.
“It’s also about organisational risk. If something happens to a manager or to his company, it’s good to have another manager you can allocate to,” he says.
“For more than one reason, it’s better to bet on two horses than on one.”
