Co-head of active equities Nick Hartley discusses how the group's investment approach complements and diversifies LGIM's broader investment offering
What is LGIM's active equity range designed to do? Why do you run concentrated, high conviction portfolios?
We have an industry-leading index business, which provides clients with equity beta in various forms. Our active equity range is set up to complement this, so our funds are designed to provide alpha. In our view, concentrated, high-conviction portfolios provide the best opportunity for alpha. In addition, we have set our funds up to target several outcomes that are hard to achieve with beta or indeed smart beta products.
Firstly, we have funds that are concentrated growth portfolios. These are for investors seeking longer-term capital growth, and you could characterise them as providing concentrated exposure to some of the most compelling long-term growth themes that we have researched.
The second area is what we describe as diversified income portfolios. If you're looking for a stable and diversified cash flow from the equity market we think that is better provided from an active perspective than from an index perspective. The UK is a great example of this. About half of the absolute income in the UK All-Share comes from 10 stocks. So theoretically you've got a 1,000 stock index but in terms of your income, it's extraordinarily concentrated on a few very large and somewhat cyclical stocks. So if you're trying to get a diversified stream of cash flows, you're better off having an active manager because they are deliberately diversifying for you.
The index business at LGIM is much larger than the active business. Is this a challenge? Where does active add value?
Well, I think people often pigeonhole LGIM as an index house for equities and too few people realise the breadth of our active products, and the investment talent that we have within the business across all asset classes. In terms of ‘where does active add value', there is an inter-dependence between the index business and the active business, particularly on the equity side because we benefit from industry-leading corporate access. That's a massive informational edge. And because we are the front line of engagement with many of our company holdings we also provide substantial input to corporate governance and ESG issues that are high on the agenda for our index proposition.
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