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The turning tide: Why investors should go active

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Craig Stent.

Investment markets constantly change, so it’s best to be prepared. An active fund uses research to take advantage of market trends and maximise returns.

Investment markets constantly change. Sometimes almost every investment goes up in value, which can make investors complacent. The NZX and many investment markets around the world are currently sitting at record highs. It’s inevitable with investing that the tide will turn at some point and many commentators believe that time may be nearing. When that happens and the tide ebbs it’s best to be picky when choosing investments, says Harbour Asset Management’s Andrew Bascand.

For investors in managed funds, it could be time to switch from passive funds that simply track the fortunes of markets such as the NZX or NASDAQ, to active funds that hand-pick investments best placed to weather harder times, says Bascand.

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Objective analysis

“At Harbour we have both, so we can look at the pros and cons objectively,” he says.

The investing landscape has been very sunny and the NZX, for example, has risen by 17.13% per annum over the past five years (to 30/09/17) says Harbour’s Craig Stent. “In the long run, however, stock market returns aren’t always this strong. The 10 year average for the NZX was 7.84% per annum.”

What that means is, compared to the opportunities for active investing in the current market, passive investing is a blunt instrument that doesn’t differentiate on quality or future prospects.

Preparing for a gradual unwind

Stent says Harbour analysts believe there is likely to be a gradual unwinding of markets.

Firstly investors could see an ebb in the very favourable market conditions that come from factors such as low interest rates and good growth, says Stent.

Secondly, he adds, Harbour anticipates an increase in the effect of disruptive technologies on companies and industries and their abilities to make profits.

That means investors should be looking for funds to maximise their returns in an environment when not all companies will do well. Active funds do that best, while passive funds simply hold a bit of everything.

Picking the winners

When times get tough in investment markets, some sectors or companies are hit harder than others. So although some might still be strong, avoiding poorer-performing companies can be important for investors. Active management is at its best when managers use their research teams to pick the companies with better prospects, says Stent.

As well as this, actively managed funds may avoid certain companies that might face difficulties.

Investing opportunities in super trends

Some of the companies on Harbour Asset Management’s radar for its actively managed funds are set to take advantage of a number of super trends, says Bascand. Those super trends include: urbanisation and increased consumerism in Asia; increased global travel; advancements in and disruption from artificial intelligence and big data; the ageing of the population and opportunities that brings for new products and services, and health care advancements, such as personalised drugs.

Investments taking advantage of these super trends are expected by analysts to do better than those in sectors that are at risk of disruption, says Bascand. The at-risk industries include media, telecoms and energy.