Active vs passive: Why investors may need to rethink the balance

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JIMMY MOYAHA: It may be a new week, but the age-old argument of active versus passive asset management is a conversation that is with us – particularly at a time where the oil price is teetering on $110 a barrel and markets are ever so uncertain, you want to find out whether or not an active strategy or a passive strategy is better suited for your investment needs.

That’s the conversation we’re going to be having with the team at Ninety One. They, of course, are an active asset manager and they’re not ashamed of that.

We’re going to be taking a closer look at this with the deputy managing director of Ninety One South Africa, Natalie Phillips. She joins me on the line now to see what to make of this. Natalie, lovely having you on the show. Thank you so much for taking the time.

As I mentioned in that introduction, Ninety One for many, many years has made no secret about the fact that you remain an active asset manager. Is there a right or a wrong here between active and passive asset management?

NATALIE PHILLIPS: Good evening Jimmy, lovely to chat to you and lovely to have the listeners on in this conversation. So good evening, everybody.

Jimmy, my response would be that I actually think the framing is wrong, not the argument that active and passive a rivals.

I would say it’s rather that the debate shouldn’t be posed as a contest of who is right and wrong.

But actually, we believe that active and passive complement each other.

We believe that there is a place for active, and it adds something that passive effectively can’t.

JIMMY MOYAHA: Natalie, let’s take a look at the current geopolitical and global conversations that have been happening. There’s been a lot more market volatility in the second administration of President Trump. That has meant that investment managers such as Ninety One have to think about investment strategies completely differently. Can we perhaps take a look at how both sides of the fence have fared in these elevated times, the passive side, the active side. Both have fared relatively well in markets that have been rather unforgiving.

NATALIE PHILLIPS: Absolutely, Jimmy. If we just look at what’s happened in the US, we’re now at a point, the last few years, where the top 10 stocks have made up around 40% of the S&P 500 [Standard & Poor’s], the highest in decades.

We believe valuations are sitting above their long run averages, and that is where we think there is concentration risk.

So you’ve had a fantastic return coming out of the passive market and passive products. We think that’s fantastic. But we do actually think that the concentration risk itself and the index weights that effectively track this market capitalisation is where the risk lies in passive.

Hence, as an unashamedly active manager, saying, particularly when you look at emerging markets right now, those are the dispersions at the moment.

The geopolitical environment has actually provided an opportunity for diverting capital away from just the US, where it’s been very concentrated, and effectively looking at emerging markets.

Typically, where active comes into play is it adapts when there are leadership changes in the market, as we call it, and there are undoubtedly big structural forces reshaping markets at the moment.

Hence, we do believe that the big Magnificent Seven, they effectively have dominated, and we think there are other winners as well that one has got to look at in the future, such as the Secret Seven, as we call them, which are more focused on Asia.

So yes, Jimmy, to answer your question, we think right now we are in another structural shift that’s taking place, and we think that the winners of tomorrow aren’t necessarily going to be an Alphabet and a Nvidia. Even within those stocks, you’ve seen Alphabet return around 66%, Nvidia around 41%, and there in itself there have been differences.

But our big argument is actually looking at emerging markets now and looking at how active plays such a valuable role within emerging markets.

That’s where active is really going to reward investors.

JIMMY MOYAHA: Natalie, let’s take a look at those emerging markets, because South Africa as an example, is one such emerging market. Many might argue it was one of the best performing emerging markets, if we look at recent data. From an opportunity perspective, that presents a unique set of opportunities for particularly investors that are not invested in Africa.

But for those of us who live in South Africa, who are already exposed to this particular emerging market, how do we navigate emerging markets as an investment piece within your portfolio and not just leave it to things like buying an index?

NATALIE PHILLIPS: Yes, Jimmy, that’s a great question. I think just kicking off, firstly, a lot of South African investors would feel, goodness, they’ve already got emerging market exposure, they live in one, why should they even consider a further allocation to emerging markets?

I think the first thing is living in an emerging market isn’t the same as being invested in one.

The JSE [Johannesburg Stock Exchange] is one of those markets and has done obviously exceptionally well, particularly if we look at the recent gold run.

But the JSE itself has its own sector mix and hence its own risks, and you’re not necessarily getting access to the breadth of what other emerging markets have to offer, as well as the specific sectors. For instance, the correlation between emerging market excess returns and the local market only sits at around 0.15%.

So actually, if you look at the analysis, adding additional emerging market exposure over and above your South African exposure, you can actually end up with a portfolio with more diversification, shallower drawdowns, and effectively also receive fantastic returns.

So as a consequence, we actually do see amazing opportunities within other emerging markets.

We talk about the Valeriepieris circle – to listeners who don’t know what the Valeriepieris circle is, I only learned that terminology in the last few years – that is effectively where 54% of the world’s population lives, and that’s effectively Asia.

If you look at that part of emerging markets, effectively, the expectation is that by 2030, 57% of GDP growth will come from the Valeriepieris circle countries such as China and India.

If you look at companies within that, you’ll see fantastic opportunities at cheaper valuations of companies within biotech, AI and all other very interesting sectors that you wouldn’t get out of South Africa, and also at more attractive valuations than similar sectors out of the US.

Lastly, by just following a passive emerging market strategy, as you mentioned earlier, Jimmy, you are not going to necessarily capture those particular listed opportunities because they are very underrepresented in the MSCI ACWI [Morgan Stanley Capital International All Country World Index].

JIMMY MOYAHA: Whether you’re looking at active versus passive, I think the crux of the conversation, as Natalie alluded to, is around the overall strategy and the overall objective of the strategy.

They seem to be rather complementary as opposed to contradictory strategies and this is what makes them the most beneficial for investors.

If you’re looking for some help around this, speak to the team at Ninety One. That’s why they’re there. We’ll have to leave this conversation on that particular note. Deputy managing director of Ninety One South Africa, Natalie Phillips, joining us to take a look at active versus passive investment strategies. Is there a winner? Is there a loser?

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