All over red rover?


Whether passive or active, an investor still assumes market risk.

The sheer volume of funds flowing into passively managed investments suggests the active versus passive debate has been decided. Earlier this year, the Financial Times reported that “While outflows from actively managed funds have hit a cumulative $1.2 trillion since 2007, overall inflows into index trackers and ETF’s have topped $1.4 trillion over that period.”[i]

Debate over? We don’t think so.

Whether passive or active, an investor still assumes market risk. Yet the most commonly cited risk for a passive investor is performance relative to the benchmark. Clearly this also matters for long-term active investors, but additional risks should also be taken into account. While equity markets have benefitted from historically low interest rates and suppressed volatility has it also coincided with growing distortions?

“Expensive Defensives” and “FANGs”

Both expensive defensives and FANGs (Facebook, Amazon/ Apple, Netflix, Google) are quite topical in regards to recent share market leadership. But if viewed through a growth lens an investor can draw differing conclusions on valuations.

Expensive defensives have arguably benefitted from quantitative easing as investors requiring yield have reached across the risk spectrum, bidding up the price of defensive, high-yielding equities. In the first half of 2016, utility stocks in the S&P 500 gained more than 20% compared to a small loss in technology names, and occasionally traded on a higher PE multiple. While the outperformance of the dividend payers subsided during the second half of 2016, the Dow Jones Select Dividend Index still finished up 21.98% compared with a 16.5% gain for the Dow Jones Industrial Average and 11.96% for the S&P 500.

Conversely, technology stocks underperformed over 2016 despite evidence that leading names continued to grow their earnings faster than the overall market. From a returns perspective, technology only ranked seventh out of the 11 GICS sectors in 2016 given a modest contribution from the FANG’s. While the recent rally in technology shares has been led by the FANGs the change in market leadership has also been supported by some of the stronger earnings profiles in global stock markets.

Don’t join them, beat them

Is a market truly efficient or are there opportunities for active managers to outperform benchmark indices? While the decision between passive and active management needn’t be mutually exclusive an unconstrained, concentrated portfolio can provide investors access to a skilled portfolio manager’s best investment ideas.

The 2009 paper “How active is your fund manager? A new measure that predicts performance[ii] introduced the concept of active share as a metric to assess how different a portfolio’s holdings are to a given benchmark. The authors found that “funds with the highest active share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Non-index funds with the lowest active share underperform their benchmarks.”

In the passive versus active debate, it could be the benchmark huggers that disappoint over the longer-term.

Concentrated Global Growth

The Zurich Investments Concentrated Global Growth Fund is a high conviction global share portfolio. The fund’s active share has historically been in excess of 90%.

The fund can invest in a minimum of 30 and up to a maximum of 50 stocks in global companies, focusing on the best investment ideas of the underlying manager, American Century. Their philosophy is premised on the belief that accelerating growth in revenues and earnings, rather than an absolute level of growth, is more highly correlated to stock price performance.

The portfolio’s exposure to the technology sector is currently the largest in both absolute and relative terms. The fund selectively maintains investments in companies such as Facebook, Google, and Tencent on the assessment that they will continue to sustainably grow earnings faster than the overall market. Further, the core drivers of growth in these businesses are attractive as they are being driven principally by structural shifts in global consumption patterns and are less dependent on the economic cycle.

[i] Wigglesworth, Robin, ETFs are eating the US stock market. Financial Times 25 January 2017.
[ii] Cremers, Martijn and Petajisto, Antti, How Active is Your Fund Manager? A New Measure That Predicts Performance (March 31, 2009). AFA 2007 Chicago Meetings Paper; EFA 2007 Ljubljana Meetings Paper; Yale ICF Working Paper No. 06-14. Available at SSRN: or


Disclaimer: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated June 2017, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance. GINN FVHHKJ.00012.ME.036. PNOE-012594-2017




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