The big and small of a winning team

On SaturdaySeptember 1, I was at the Bledisloe Cup rugby union match in Sydney, along with 91,000 other rugby fanatics. Australia got the right result in the final minute. It was John Eales’ final game before the captaincy passes to vice captain George Gregan. The most successful years in Australian rugby have been these last few, with both the big and the small man combining to lead Australia to their greatest successes.

It’s not been a matter of arguing whether the big man or the small guy has been better. The fact is that they have combined very effectively, maximising their own potential and bringing the best out of their team.

This example illustrates the fact that big and small work well together, each bringing different skills and attributes to the game. To analyse a game, such as rugby union, in terms of whether the big or the small men are better is flawed. In funds management, I believe it could be the same.

Both big and small sized investment management groups have positive attributes, a point that Kerr Neilson makes very effectively in his article last week.

Indeed, examination of the blending opportunities available in the market show that a mix between, and forgive my bias here, Fidelity Perpetual with Platinum funds is the most effective international blend available.

Using Mercer analytics, I examined three years excess returns to June 30 of this year for the nine funds that had achieved greatest inflows over the last 12 months.

A 50/50 combination of Fidelity Perpetual and Platinum reduced the risk of the total international portfolio by 2.99 per cent, the largest risk reduction possible from within this universe. The low 0.24 per cent correlation of these excess returns provides further evidence of the benefits of blending the two.

This is of interest, because the groups represent opposite ends of the spectrum. Fidelity being the world’s largest active equity fund manager, while Platinum is the smallest in the group. Could it be that the relative sizes of the two, and the characteristics associated with these relative sizes, is a factor in the effectiveness of a blend of the two?

So, far from the debate being over whether large or small is better, it should be understood that both large and small managers have positive attributes. When combined, like Eales and Gregan, the results can be very effective indeed.

Sticking with the idea of combined resources, there is even greater strength in combining the resources of a well-established and reputable local manager with those of a large scale international manager.

It may be true that small fund management groups are more flexible and prima facie would appear less constrained by the business issues outlined by Kerr Neilson.

However, this probably does not give sufficient credit to the diversity of product and styles within the larger groups these days.

Indeed, it is the advantage in terms of resources — in the case of many of the larger managers there are often hundreds of analysts throughout the world — that the large managers enjoy, which allow the large managers to offer that diversity

This offer of diversity is a critical point. The large manager offers a range of highly specialist funds and products. Most have continually expanded their fund range, in terms of investment styles offered as well as sectors and markets covered, to provide investors with a wide range of choice. Importantly, many of these enjoy the critical mass to offer investors the security that they will be around for the long-term.

This choice acknowledges the needs of the research groups and advisers. Advisers have a need to construct balanced portfolios of different fund management groups, offering different products in different asset classes to suit the different needs of individual investors.

To do this effectively, they need to have access to products and funds that have a high degree of predicability in terms of philosophy, process and style, so as to allow combinations of managers to be effectively chosen then mixed or blended.

This leads to the issue of relative performance, by managing funds, relative to a given benchmark.

It is true that the giants are managing for relative returns. However, there are very good reasons for this. A manger has to remain true to label and style, so that advisers can properly blend funds and thereby achieve a desired asset allocation for their client.

If a small manager, managing for absolute returns, has a fund misplaced in a blended line-up, then the consequences can be disastrous. For example, an equity allocation, put in place for good long-term reasons by an adviser on behalf of a client, could be overridden by a fund that sees that decision as its responsibility.

To allow effective blending, the adviser needs to be able to rely on the style and the attributes of the product being sustainable. This is therefore a virtue of the more predictable and reliable investment approach.

So far from large managers being allowed to “abrogate what most believe to be their prime responsibility” by managing for relative, rather than absolute returns, they are simply playing the role that advisers and researchers want them to play. Further, it is a role they play well, particularly in this country.

As mentioned earlier, being large does have a number of advantages that Kerr Neilson acknowledges. These include the ability to research extensively and include a much wider universe of stocks.

There can be no argument that having the resources to effectively research over 7,000 stocks does extend the investible universe available for clients and unit holders in the funds managed by a large manager. The chances of the larger manager finding a new and emerging company must therefore be greater.

Using the sports team analogy, it gives a diversity in approach which expands the team’s overall scoring ability, while at the same time strengthens its defences. Not a bad basis on which to build a winning team.

Michael Gordon is the investment directorfor Fidelity International.