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Add a little passion to those investment plans

Alan SteelFormer US Secretary of State Colin Powell who knows something about success said: “The secret of success is easy… Preparation, Hard Work , and Learning from Failure.”

Who would argue with that? Although passion is surely a necessary ingredient too.

Winners don’t get to the top by being passive do they?  Have you noticed passion and passive share the same first five letters? What a difference the last two letters make.

So why’s there a growing consensus that passive is the way to invest? Experts tell us the evidence supports it. What evidence? My grannie used to say:”Once you get a reputation for getting up early in the morning, you can stay in your bed all day.”

I never understood that until now. Despite results supporting the case for active, too many still believe the “you can’t beat a tracker” brigade

Even Warren Buffett has joined the fan club. He has just announced that when he dies 90% of his bequest to his wife should be dumped in a US Index Tracker….. Maybe he disnae like her.

This is hard to comprehend given that by applying the value investment principles of his mentor Benjamin Graham, Buffett achieved average returns of 23.8% a year for 53 years by being active not passive. And Graham’s still regarded as the Godfather of Active Value Investing.

However, in the interest of fairness, I have to admit that few US active managers outperformed the S&P 500 Index over the last 10 to 20 years for some reason or other. So there is a case for passive over there.

But what’s an index? It’s an average of sectors. In certain economic conditions some benefit, others don’t. Then as the economic cycle changes, winners become losers and vice versa. Surely it’s not difficult to spot cycles, ignore losers and back winners as Buffett does. Maybe the variety within the US makes it too much like hard work.

Over here it’s a different story. The FT All Share Index (roughly 1000 shares) is dominated by a few. Last time I looked half of the Index performance is down to only 20 stocks. That’s thanks to UK Indices being Capital Weighted, so the bigger the capital value the bigger the influence on performance. Have a look back at the disasters affecting the UK big stocks since 1999.

So, what triggered the cult of UK index passives? In March 1995 the people’s champion Richard Branson took on the establishment with a FT Tracker. He promised to shake up the UK investment industry he said was charging too much. He’d show them.

Today the Virgin Tracker, over £2.4 billion in size, charges only 1% pa. What’s it done over the last 20 years? It’s up 183%. Ooh. The FT All Share Total Return is up 243%. Hmm. Over the last five years Virgin has returned 23.7% compared to the All share’s 29.6%. In the last 12 months it’s down 9.5% while the Index is down 8.7%. Oh dear.

But compare all that to one of our long term favourites, Neil Woodford, a value disciple who charges more than passive trackers to compensate for his preparation, hard work and learning from failure. His flagship fund for the best part of 25 years Invesco Perpetual High Income returned over 20 years 691% after charges, over five years 60.9%, and his new baby Woodford Equity Income is steady over 12 months at +0.2%. He’s far from being alone too.

All it needs is some preparation and hard work to find the stars. As Yogi Berra said: “It ain’t rocket surgery.”

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

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