What does the future hold for the active investment manager?
As popular index funds continue to post steady returns at low costs, active investment, particularly in an investing world that can seem increasingly reliant on policy indicatives, is increasingly being called into question.
Or, as an October headline in The Wall Street Journal more succinctly put it, Are Fund Managers Doomed?
Doomed? No. Challenged? Always.
According to a panel of veteran fund managers at the University of Virginia Investing Conference, the two-day event held at the Darden School and sponsored by Darden’s Richard A. Mayo Center for Asset Management, the current investing world, in which government policy seems to be the largest driver of capital markets, has caused many to rethink long-held investing philosophies.
With a new president poised to potentially usher in an entirely new set of influential policies, panelists weighed in on best ideas going forward and whether the traditional tools for evaluating stocks still held currency.
Dick Mayo (MBA ’68), the namesake of Darden’s asset management center and the chair of Mayo Capital Partners, said that while large swaths of the current macro environment could turn, given a new administration, we are now in period of “elevated uncertainty,” leaving him to emphasize a defensive approach at present.
Mayo, who described himself as a “value investor who spends a lot of time thinking about the macro environment,” said he was not “totally pessimistic,” but saw too many industries struggling with profitability and wanted to see fewer correlations between the market and external factors, like interest rates, before turning bullish again.
Mayo said his “ideal candidate” for a stock has changed over time, but he often seeks industries or companies that the rest of the business world seems to have forgotten about, noting his interest in airline stocks in 2010, at a time when that industry had fallen out of fashion despite systemic efforts to revamp management and change once-bloated cost structures.
Stephen Goddard, the founder and managing principal at The London Company, agreed that seemingly out-of-fashion industries remained ripe for further exploration.
“Our best opportunity has been in consolidating industries that are considered dead,” said Goddard, noting successes in recent years with companies as diverse as the petroleum additives company NewMarket Corp. and the firearm manufacturer Luger.
Skipjack Global Capital Management Co-Founder and Chief Investment Officer Gibboney Huske (MBA ’97) similarly followed downtrodden industries in which one has a “winner-take-most outcome.”
Huske said she’s finding opportunity in Japan, at present, noting a consolidation in certain of the country’s industries and a “huge focus on improving corporate governance.”
A business like the beauty products company Shiseido is an example of a little-known Japanese company worth following, Huske said, a company in an infrequently covered industry with solid fundamentals, expanding margins and a heavy marketing investment that has begun to pay off.
So despite the nuance and human expertise that active management demands, are there lean times ahead for the active manager?
Mayo said he believed the movement to passive, lower-cost funds was a serious issue, particularly if one accepts the conventional wisdom that we are in a low-return world. In such an environment, Mayo said, it may appear that the most effective way to earn more is to pay less.
Said Mayo: “When the population [of fund managers] is so large, what is your potential value add? It gets more difficult, and it’s going to be an ongoing issue.”
Huske viewed the current movement to passive as “more cyclical than secular,” noting, “to the extent we are moving to a new era, that provides new opportunity.”
Huske cited the example of diamond-mine stocks that have been beaten down because of their inclusion in broader mining indexes, despite rising demand and solid fundamentals.
That ability to buck the passive herd in such instances may prove increasingly valuable.
For more on the conference, please see “University of Virginia Investing Conference Surveys Post-Election Uncertainty and Opportunity.”