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Robin Hepworth, Chief Investment Officer and fund manager of the EdenTree Higher Income Fund, discusses how a unique aspect of his active management approach - low portfolio turnover - has contributed to his outperformance over the long-term.

Doing Nothing: The other half of active management

Robin Hepworth Robin Hepworth Chief Investment Officer
Doing Nothing: The other half of active management
Opinion

Doing Nothing: The other half of active management

Robin Hepworth

Robin Hepworth
Chief Investment Officer

In the last few years, the debate concerning the merits of active and passive management has heated up considerably. It cannot be denied that on a global basis average passive funds have outperformed their active peers since the financial crisis (though this phenomena is mainly evident for US mutual funds).

Indeed, what the figures have shown is that many “active” funds were essentially charging the higher fees afforded by that status while running portfolios that closely mimic their benchmarks. In net terms, the performance of such funds significantly lags that of their passive peers, due to the higher fees that they charge.

However, truly active funds, like the EdenTree Higher Income Fund, have not struggled in the same way. This fund has outperformed its benchmark over the long run through active security picking and, crucially, maintaining positions over significant periods in companies and securities that we truly believe in. It has also maintained a strong and growing dividend within its target since inception. 

PATIENCE IS A VIRTUE

Active investing centres on selecting the best opportunities from a pool, by applying any range of numerous analytical techniques. But, to be most effective, long-term activeness also relies on maintaining positions over extended periods. Markets are, for the most part, efficient, with prices accurately reflecting all publically available information. Because of this, investment is one of the few areas in life where effort and reward are often negatively correlated.

Since inception, the fund has outperformed its benchmark by 163%. A key aspect of that outperformance has been its low turnover.

There are two further reasons why a high turnover is problematic; there is a degree of lag in both exiting a position and in terms of rebuilding it once a stock regains its value, so the underlying investor may lose some capital simply from this lag. Further, every time an allocation is changed, it incurs trading costs, which for an active manager will often be passed on to the underlying investor in the form of higher fees or lower income.  

At EdenTree, we believe that keeping our clients at the forefront of everything we do is a core tenet of being responsible investors. A part of this is maintaining our position in a stock, unless our fundamental investment case has been changed by the external influences on it.

This limits costs and ensures that our investors get the best outcomes from their investments, alongside defending their capital to the highest degree achievable. In this sense, doing nothing can do good. 

THE WAITING GAME

The benefits of patience and doing nothing when it is unclear what action to take have been exemplified by the EdenTree Higher Income Fund since its inception. Over the course of that period, the fund has outperformed its benchmark by 163%. A key aspect of that outperformance has been its low turnover.

For a fund manager to be truly active, and to justify truly active fees, it is vital that they take a disciplined approach to company selection. However, we believe that to truly act in the best interests of investors and to be successful in the long term, active managers must be disciplined in their approach to selling securities too. Doing nothing can actually be the best thing for investors.