SIMON BROWN: I’m chatting now with Anton Eser, CIO at 10X Investments. Anton, I appreciate the early morning time. If we go back five, six, seven, eight years ago, the debate around active versus passive investing was fairly divided and folks were kind of sitting in separate camps and kind of raw. You make the point that actually the debate is now nuanced and the smart investors probably are doing some of both and, depending on their requirements, would depend on the percentages. But passive and active actually work very well together.
ANTON ESER: Hi, morning Simon. Thank you. Yes, you’re right. It’s been that way kind of globally for a long time, where you either believed in passive or you believed in active and everyone had these very strong views either way. But it all changed five to 10 years ago, in particular in the US and in Europe, and this whole idea [developed] of, well, let’s really think about how we can bring these things together and in the end ultimately reduce costs and deliver great returns for clients’ net fees.
If you look at a large part of active management, a large part of what’s actually happening within the portfolio is effectively a replication of the index.
So a lot of consumers are paying active fees, when in fact 80 to 90% of what they’re getting is index replication. So by bringing the two together you can reduce fees and deliver a better result for the client.
SIMON BROWN: I’ve always done it, because I recognise I have blind spots – for example, bonds. I know nothing about bonds, so if I want some bond exposure, I’m better off just getting a passive and fitting that into my portfolio. I remember chatting with your new CEO, Tobie [van Heerden], when he came in late last year. He was making the point that there are some regions where you actually anticipate alpha being maybe ‘easier’ – and I use that word cautiously – to achieve, and therefore you would perhaps want some active.
So it’s going to be kind of that horses for courses, to throw a bad cliché out.
ANTON ESER: Yes, that’s right. And bonds, I think, are actually a great asset class to use because, if you look at government bonds, you’re spot on, and government bonds [are] very difficult. Effectively you’re taking a view on the movement in rates and therefore on inflation; there’s a little bit of a macro-political view as well. But in the end it’s a very one-dimensional bet that you’re taking: do you believe rates are going to go up or down? To really get that consistently right is very difficult.
Whereas in corporate bonds, so credit markets – where you have the ability to buy numerous issuers – your access to issuance is very important. There are so many other elements coming in that you really can see why doing that in a passive way, which is effectively buying the corporate bond issuers – which are issuing more and more and more which is kind of counterintuitive – you can see the ability to generate active reliable alpha there, whereas in government less so. So that’s a great asset class to use as an example.
SIMON BROWN: You mentioned fees, and part of the debate, as you say, back in the day – five, 10 or more years ago – was all about fees. Fees are important. We totally get that. But these days we’ve seen pressure on the downside, both in the active and in the passive space. If you’re going to pay an extra 20, 30, maybe even 40 or 50 points more for active [which] can deliver and is delivering alpha, particularly perhaps in their niche, again [it’s] well worth that extra bit of fee.
ANTON ESER: Yes, definitely. That’s right. I think there are some great active managers out there. They typically are specialists, they’ve got areas where they’ve got great analysts, great teams focused on it, and a proven track record. There, absolutely, that’s where you want to be paying for, as you say, alpha, and using that fee very, very carefully.
But also in asset classes like infrastructure finance, in private asset classes like credit or equity, that’s where the need to pay up is very important. And if you are freeing up, let’s say, your cost budgets by utilising the index to replicate the other portion, the much more difficult areas to [get] alpha, to spend it on areas where you can get that alpha is very important.
SIMON BROWN: I take that point. We’ll leave it there. That’s 10X Investments CEO Anton Eser.