Ever since John Bogle launched the first index fund in 1976, the respective strengths and weaknesses of active and passive management has proven to be one of the most debated issues in the world of investing. Every investor will have grappled with the topic at some point – and probably have formed their own strong opinion. Clearly, we’re on the active side of the fence, but there is nuance. There is room for both styles to be present within the same portfolio; it doesn’t have to be a binary choice that investors face.
We do, however, believe that we can beat the benchmark. Our own active approach is built upon the depth of our research and thinking which gives us the confidence to run a concentrated portfolio. We take a great deal of care to invest in businesses that we understand thoroughly, and this enables us to offer something different to a passive approach, with no exposure to more cyclical or capital-intensive parts of the market such as utilities, energy, materials, retailers, banks, insurers, autos and telecoms.
We buy to hold
Most of our days involve monitoring the companies we own or are considering purchasing. We buy to hold. Some of the businesses we own have been around for generations, and we have held many for over a decade on our platform, navigating various environments.*
- Nestle: strong market positions in attractive, everyday staples categories including Coffee and Pet Care.
- Microsoft: Has transformed from licensing its products to a subscription model across all units. The company constantly innovates and evolves.
- Moody’s: an indispensable part of the global financial system, facilitating the flow of credit.
*Examples of stocks held by the Quality investment team at Ninety One.
Our approach provides in-depth qualitative analysis required to assess the durability of a company’s competitive advantage and efficiency of capital allocation in addition to robust forward looking free cash flow modelling and quantitative elements. By contrast, a passive quality approach is reliant on backward looking quantitative metrics to build the index, failing to capture a qualitative assessment of the quality characteristics and the durability of these attributes moving forward.
Valuation is central to our process, and the ability to assess the price you are paying for the quality or growth characteristics, which you do not get in a passive approach. Nor do you get portfolios that are built in a way that affords the biggest weighing to what we consider our best investments with the least downside. Another important feature available to us as active investors is the ability to pay attention to the correlation of business risks across holdings to avoid duplication and discuss any pertinent sustainability issues with a company.
Resilience in weaker markets
With such a focused and diligent approach, we think it’s possible to be right a lot more than we’re wrong. Whereas passive strategies realise the full downside of the equity markets, our active quality approach has the potential to provide much-needed downside protection in uncertain markets, while also participating in the upside during rising markets. This provides more adaptability and resilience in weaker market environments.
This helps develop an asymmetric return profile, meaning the portfolio can protect on the downside, without sacrificing upside. Preserving the base during challenging markets enables richer compounding during more profitable times. Strong bull markets may favour more aggressive or momentum styles, but the appeal may not last across more varied backdrops. For that, you need companies with low sensitivity to the market cycle and strong fundamentals.
Fortunately, there are very attractive quality opportunities across a variety of different businesses in different sectors and across the market cap spectrum, but it takes an active approach to find them.
