Goshawk AM: ‘Passive is risky’ and the case for active management in a global market

Illingworth left Artemis Investments at the end of last year, departing alongside the retiring Simon Edelsten, with who he has since reunited at the pair's new venture, Goshawk Asset Management.

Goshawk is backed by Christopher Mills' Harwood Capital Management, and recently acquired Vermeer Investment Management, with leading fund managers Charlie Fricker, James Rowsell and Tim Gregory joining forces on the Goshawk strategies.

In a basement boardroom in Mayfair, Investment Week sat down with Illingworth, Edelsten, Fricker and Gregory, each chiming in regularly in a manner akin to the flat fund management structure that the firm has adopted.

The risk of the index

Illingworth admitted that the risk managers in the City may take a diametrically opposed view to his own, but stood by the conviction that "passive is risky", despite its growing market share over the past decade.

"Their definition of risk is versus the benchmark, and therefore, obviously there is no risk. So, if you take that to a logical conclusion, the most risky thing you can do is have 100% cash from a risk manager's point of view," the ex-Artemis manager said.

A passive decade: Only 35% of active funds outperform tracker alternative over ten years

"If you think about that, it is actually almost a bit bonkers," Illingworth argued, noting that when he and his Goshawk colleagues first joined firms in the City, indices were more diversified.

However, he added: "Now it is completely dominated by the US and very dominated by technology and other correlated stocks."

As of 31 October 2024, the US alone represented the lion's share of the MSCI World index, accounting for over 72.7% of the benchmark, with information technology also the most heavily weighted sector, at just shy of 25%.

"The index was totally different when passives were first launched," said Fricker. "It is funnelling capital into the same place in this self-perpetuating cycle, with more money flowing in that is completely valuation agnostic," he added.

Illingworth concurred, noting: "You would not put three-quarters of your money in any country, and you certainly would not have half of that all in correlated, expensive stocks".

The Magnificent Seven story

The team was keen to note that the criticism of passive was based mostly on its lack of agility rather than overconcentration.

Investors split on whether AI investment case can justify Magnificent Seven's cap-ex growth

In response to whether the Magnificent Seven's growth is sustainable, Illingworth said there is an "awful lot" spent on research and development, with varying degrees of waste.

"People ask: 'Are you worried?' I mean, I might be worried from a democratic view that these companies are spending money, but from a mercantile investment point of view, I am excited they are seeing the opportunities to spend money."

According to research from Capital Group, last year the Magnificent Seven spent over $170bn in capital expenditures and over $200bn on research and development, a figure that is forecast to hit $300bn in 2025.

"These guys have no constraints on capex because the market rewards them for spending and they are incredibly cash generative… It will make it very difficult for anyone to catch up but that is a problem for the politicians," said Illingworth.

"Sometimes I wonder how much interest rates matter for the equity market," he added.

The outlook for the UK

With the levels of expenditure and growth in the US, "it is difficult for the UK to get out of its lane", said the former Artemis fund manager.

"Rachel Reeves has done what she thinks is necessary for the national finances and it has not been helpful for UK plc. It is hard for her to be helpful for UK plc given she has only got a certain amount of debt facility," he added, a problem that is less prescient in the United States due to the fact the dollar functions as the world's reserve currency.

Edelsten, chair of the firm's investment committee, stressed the same point: "If you compare [the UK election] to the Trump victory in America, which politically, one may have enormous doubts about, and socially, certainly you might not want to live there, but it is a vote to go down a quasi cut-taxes-and-go-for-growth lane, which is pretty much the opposite of the Rachel Reeves choice."

UK public sector borrowing jumps £1.6bn as Treasury reiterates repair pledge

In an effort to reinvigorate and transform the UK's struggling capital markets, Gregory argued that the UK should invest in technology and funnel capital into the sectors in which it has historically thrived.

However, in Illingworth's view, the UK suffers from a pan-European issue of balancing its welfare system with the low-tax environment needed for growth.

"The peace dividend is over. We are in a period where the cost of money is higher and we cannot just go and print money anymore, so there are constraints unless, of course, you are called the United States of America," he argued.

Despite the difficulties of investing in the UK, Goshawk remained adamant that private markets do not appeal.

"There are plenty of other people who do [invest in private markets]," said Edelsten. "I am slightly suspicious of people who say you need to, maybe because they are not good enough at picking stocks."

Instead, the new boutique, which offers an active ETF for a 0.69% fee and a unit trust for a 1.15% annual management fee, remained steadfast in its conviction that its focus on pure fund management will prevail.

"The team is well settled and hugely experienced. There is a possibility we add an assistant, and there is a possibility we get a bit more help on the sales front. All of those, if we do them, are designed to give us even more time to do fund management," Illingworth concluded.