Jupiter Independent Funds: It’s a ‘dangerous’ time to invest into passives

John Chatfeild-Roberts leads the Jupiter Merlin multi-manager team.

The team behind Jupiter’s multi-manager Merlin portfolios has warned investors of the dangers of choosing passive over active management at a period of high stock valuations and challenging market conditions.

Jupiter Independent Funds fund management director Algy Smith-Maxwell has argued this is “the most important time” for investors to go into active management and back off passive management as lack of liquidity and overvalued stocks take centre stage.

He says: “Our concern is that we may be entering a period where investors have wind in their face. At the moment it is almost impossible form them to invest in liquid assets that have daily dealing and to find decent yields at time when bond rates are so low.

“They also find it incredibly easy to be encouraged into investing in passive”.

The team argues passive funds struggle to match the returns of the benchmarks they usually track.

In particular, Smith-Maxwell says it is “a dangerous time” for new investors to invest into passives as often they overlook performance when indices are on the rise.

He notes how in the first quarter of the year only a few stocks have made US indices significantly overpriced, for example.

He says: “Between 1 March and 9 May this year there are five stocks in the S&P 500 that increased the value of the index by $269bn. And those are Facebook, Amazon, Netflix and Google.

“Over that period of time the S&P500 went absolutely nowhere…Which meant the other 99 per cent of the market lost $269bn. When equity markets are so driven by a very narrow leadership of a big and liquid index it is a ringing of the bell to the Merlin team that investors need to be wary of investing in indices.

“It is not all bad news because we may well be wrong and equity markets might just go nowhere from here having come a very long way”.

Jupiter says it only uses passives on a technical basis within the Merlin range.

While Smith-Maxwell says some passive funds “can work”, the team will stick to the managers that can find value and by focusing on new talents, as well as retaining more established ones such as Neil Woodford.

Independent Funds head John Chatfeild-Roberts says: “We still own a lot of the Woodford Income fund, It’s fascinating what he is doing. He sees companies with a lot of good ideas. Passive investors are not going to get even close to that.”