The role of patience and persistence in active management

Tim Buckley: Kaitlyn, investors are often surprised to find out that we're the third largest active manager in the world. In fact, you lead the group that selects those managers and oversees those managers—some 30 external managers. So that gives you a unique perspective on what's going on in the markets and what they're saying. Any panic out there or are they seeing more opportunities?

Kaitlyn Caughlin: So our external managers are really thinking for the long term, now and like we expect them to do all the time. It's actually one of the things that we consider as a key piece of our active edge: Is that our managers are able to think beyond some of the short-term events and remain really focused on understanding a company’s long-term value. So what does that mean we’re seeing more tangibly right now? Some of our managers are doing nothing. Their instincts are actually telling them to sit tight, while other managers are actually thinking about it and taking action to reallocate some of their portfolio to their best ideas or even selectively looking to buy new stocks right now because the prices are much more reasonable.

Tim Buckley: I want to key off a couple things that you said there—that long-term orientation of our managers, that there really is no seasonality to active. And we hear it all the time. You hear people. You might hear it in the press. You might hear a couple investment professionals saying, “Hey, active will protect you on the downturn” or “active’s where to be when the market comes back.” But that's a very short-term orientation. I think about some of our long-proven managers. Think of Wellington. You think of individuals like Jean Hynes on health care or Kenny Abrams through the years. You look at James Anderson at Baillie Gifford or the team at PRIMECAP. They all have a very long-term view.

Kaitlyn Caughlin: Yes, that's exactly right, because even when you look at the data, if you look back from the 1980s onward and you think about the several bear markets that we've actually experienced, sometimes active outperforms and sometimes it doesn't.

Tim Buckley: I think, actually, most times it doesn't. I mean on average, for the past five downturns, active's only outperformed one of them. Now our managers have done very well, so I'm talking about all active managers in general. So it's not a cure-all for downturns.

Kaitlyn Caughlin: No, it's not. And so what we want our managers doing right now is really doing what an active manager is supposed to do: really thinking about the fundamentals of a company. And so while it might mean that right now there are opportunistic buying opportunities, it's really about the fundamental long-term value that a company represents.

Tim Buckley: And it can take time to actually realize that value. So if you're one of our clients and you invest in these funds, then you probably have to take that same long view, because active returns can be very lumpy.

Kaitlyn Caughlin: Yes, and I actually think that there is an interesting connection there between the external advisors and our clients. We want our external managers taking a long-term view, but it's important for our clients to as well, because when you take on active risk and you are investing in an active portfolio, sometimes as an investor you have to be able to withstand a bit of the bumpy ride that can come along on the road to long-term outperformance.

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