Active V Passive

Table of Contents

James Baxter, Founder

The Herd versus Artemis Global Income

We know the debate on whether to pay fees and invest actively with advice from someone like us, or simply go and buy an index fund has been on a good deal of our clients minds. It is not surprising why this is.

The simplistic argument for passive equity investing is very compelling.

The chart below shows the FTSE World index (purple) versus the IA Global Sector (brown) which represents the average return of active managers investing in global equities over the last 30 years. The gap between the two currently looks huge over that time frame.

FT World Index V IA Global Sector

Artemis Global Income 12 month Returns vs IA Global Sector, S&P 500 and Nasdaq Indices

That is enough to persuade some investors and indeed some advisers to join the herd, ditching active management and buying the index.

It is a big herd! In March 2021 Bloomberg predicted passive funds would overtake active managers within 6 years. According to the FT, just three years later it has already happened. In January this year they wrote:

At the end of December, passive US mutual funds and ETFs held about $13.3tn in assets while active ETFs and mutual funds had just over $13.2tn, according to data released by Morningstar. On net, active funds shed about $450bn last year. Passive funds took in about $529bn.

And where is all this passive money going? The vast majority goes into vanilla index tracking funds tracking the main US index, the S&P 500, and to a lesser extent the World Index.

Passive investment management has won the day and now the vast bulk of money invested globally invests on one single criterion, the size of the company, its market capital value.

Just think about that for one second, this enormous herd of investors has no other conviction than they want to invest as cheaply as possible and in the biggest companies in the US. Beyond that they just don’t care.


Joining the herd has been very profitable. The Fidelity US Index fund we own in our equity portfolios has compounded at 15.1% p.a. for the last 10 years according to FE analytics, generating a little over 300% return in 10 years. Its has made us 22% in the last 12 months.

The combination of the continuing digitisation of the world dominated by the US’s mega cap tech companies, fuelled by low interest rates and pushed by the momentum of the herd has seen a golden era for the US index.

The big question of course is will it continue?

Artemis Global Income

The investment team at Artemis see changes in the wind.

Higher interest rates putting a hard cost of money back into investment markets, the sobering ‘ice bucket’ which values profits this year and next more highly than a promise of profits in the distant future. ‘Stuff not Fluff’ is a term they used which resonated!

Peak globalisation with a trend back to ‘local’ as countries seek to be less dependent on global supply changes against a backdrop of geopolitical risks. Think the US chips act and Germany’s rapid diversion of energy sourcing away from Russia.

What the herd ignores with so much money pouring into the US index and coming out of active funds, companies outside the index, good and bad, are failing to attract investor interest, so their prices have fallen.So whilst the herd continues to chase up the price of Microsoft, Nvidia et al, the opportunity set for active managers with the flexibility to invest away from the main US index is now huge.

Whilst sentiment drives daily movements across the whole market, it is earnings news which ultimately makes the big changes in share prices. Where many of the biggest companies in the world are now ‘priced for perfection’ it will become harder and harder for their earnings releases to surprise. However this is not the case for companies away from that mega cap index and this is what has driven Atremis’s returns.

Artemis Global Income has just made over 30% in the last 12 months beating the World, S&P 500 and Nasdaq indices without owning a single company in the so called magnificent seven.

Artemis Global Income 12 month Returns vs IA Global Sector, S&P 500 and Nasdaq Indices

Artemis Global Income 12 month Returns vs IA Global Sector, S&P 500 and Nasdaq Indices

The Artemis team have made these returns in sectors such as banking, defence and mining – stuff not fluff! Some of their biggest returns have been from Japanese companies and not from the US.

Top stocks have included Mitsubishi Heavy Industries, Mitsubishi UFG Financial Group, Petrobas and BAE Systems.

Looking at the portfolio the differences to the MSCI World index are stark:

  • c36% in the US versus c75% in the World Index
  • They are substantially overweight banks, insurance, capital goods and energy and underweight software, media and entertainment
  • The companies they own are roughly 40% cheaper as a multiple of earnings than the World index
  • The companies they own while still classifying as ‘big cap’ average c$90bn in value versus the $1.5trn average market cap of the top third of the index

Mitsubishi UFG Financial has a market cap of $130bn and price earnings ratio (p.e.) of c11.

f your criterion for investing is to weight towards the biggest companies in the World you will get negligible exposure to Mitsubishi UFG Financial by investing in the index with the likes of Microsoft at $3 trillion market cap and p.e. c36 or Nvidia $2.7 trillion, p.e. c65.

On a £100,000 investment that’s the difference of exposure to Mitsibish UFG Financial of £2,500 in the Artemis fund and £150 in the index.

All p.e.’s sourced Yahoo Finance 31st May 2024.

This table from our platform providers AJ Bell published in the last few days caught my eye and also suggests that ‘green shoots’ may be appearing outside the S&P 500.

Returns for well-known US and UK stocks over the past 18 months

Sources: AJ Bell and SharePad, data for 18 months to 23 May 2024, total returns in sterling

Tideway’s Position

Could this be the start of a trend of active managers outperforming the index?

It is certainly something we have not seen in the last 5-6 years, but when we look back further before 2016 we can see a different picture. The Artemis Global Income fund outperformed the World index in six consecutive years between 2010 and 2015, outperforming the index by about 30% in those six years. The debate on active v passive would have been very different in 2015.

The good news is that we don’t have to make the choice between 100% active or 100% passive. We can own both the index and active managers who truly are being active and investing away from the index with sensible strategies that should lead to outperformance. It would be foolish to bet against the US index for the next decade, but nor do we need to put all our chips in what is widely considered to be the narrowest group of mega cap companies in a generation.

Time will tell whether more managers can outperform like Artemis, but immediately we invest with them alongside the index we know we are adding diversification not duplication and reducing stock specific and sector risks.

Nick Gait, Investment Director

Fund in Focus: Heriot Global – Dundas Global Investors

We discussed in our January webinar, that Heriot Global fund, run by Dundas Global Investors was one of our highest conviction strategies in Tideway portfolios. For those who have not seen the webinar, you can click on the following link which will take you to the recording on our website. Should you not have the time to review again in full, you can skip to the 27:40-minute mark.


As a brief reminder of the philosophy, the team hunt for great businesses that they believe will be able to grow for extended time periods and like to hold them for the long term. They believe that growth is the largest component of long-term returns with dividend growth prized as the most reliable growth metric.

Dividend growth explanation:

Dividend growth is generated by companies that can consistently grow their sales and profits over the long-term
The dividend paid is a function of the pay-out ratio; how much the company decides to pay out to reward shareholders versus how much to retain to re-invest in the business to drive future growth.
Dividend growth should equate to business growth over the long-term otherwise the pay-out ratio will change
Companies within the fund on average have had a consistent pay-out ratio of between 30-40% since inception of the Heriot Fund
The team expect share prices to follow dividends over the long-term, otherwise the valuation and dividend yield will change – this is monitored closely by the manager
The fund targets dividend growth significantly in excess of the index dividend growth
A tried and tested way to beat inflation

2024 Dividend Table:

As we all know share prices can be very volatile over shorter time periods, especially when market sentiment is overly strong or negative. Continuing to evaluate the fund based on ongoing dividend growth metrics is a great way to monitor how their companies are performing and helps isolate out short term noise enabling us to avoid any rash decisions based on short term performance.

To the end of March 2024 there have been 25 dividend announcements with an average dividend increase of 12.6%. This should give our investor comfort that the underlying companies remain in good health.

Dundas Global Investors, 31st March 2024

Source: Dundas Global Investors, 31st March 2024

Heriot Global versus the MSCI World All Countries World Index (ACWI):

Geography & Sector:

  • Although the US has dominated market returns over the last decade, causing the weightings of US stocks to become an ever-larger part of the benchmark, that has not always been the case when looking back through history.
  • The team are bottom-up stock selectors hunting for the best opportunities globally meaning they select companies based on merit rather than where they are listed.
  • There is no US version of LVMH and there is no European equivalent of Microsoft.
  • The fund is even more well diversified when viewed on a revenue basis
Dundas Global Investors, 31st March 2024

 Source: Dundas Global Investors, 31st March 2024

  • The fund is equally diversified on a sector basis. As with geography the fund does not target weightings in any sector and is a product of the best ideas dividend growth ideas. The largest overweight is to Health Care and current largest underweights are to Energy, Consumer Discretionary and Communication Services.


Valuation/ Fundamentals:

The team employ a Red Amber Green (RAG) approach to stocks in the portfolio with stocks assigned an Amber rating when valuations become too frothy or if there are any concerns about a company’s ability to continuing growing at a reasonable rate. Concerns around ESG, which could affect future growth would also cause a company to be labelled Amber. A red rating is assigned if there is an imminent concern which needs to be evaluated. This will be reviewed monthly by a different analyst until the team is comfortable or the stock is sold.

The index on the other hand has no such mechanism, with the potential for the valuations of the largest companies in the index to get extended as passive monies continue to flow in. Although we believe it is appropriate to hold passives in some instances, we do not think it is wise for all monies to be managed like this.

Please see some metrics over the life of the fund which help support why we are happy holders versus the index.

Growth rate: Average of 56% higher than MSCI ACWI over life of the fund
Return on Equity: A gauge of profitability and efficiency of profits – 46% higher
Gross Margin – The portion of a company’s revenue remaining after direct costs: 51% higher
Operating Profit – The money left after paying all business costs, before tax: 32% higher
Net Debt/ EBITDA– A company’s net debt versus its cash flow: 45% lower (lower is better).
Forward Price to Earnings Ratio: 32% higher – Paying a premium for strong business fundamentals
Forward Dividend Payout ratio (covered earlier): 11% lower
Dividend Growth – hopefully self-explanatory by now!: 110% higher

Concentration Risk:

  • The fund contains 25.30% in the top ten holdings. Although this is similar to the MSCI World ACWI, we hold this fund alongside other active and passive strategies.
  • Higher conviction positions will continue to be allocated to when new monies come into the fund, only when these stocks retain a ‘green’ rating.

Market Capitalisation:

  • Much more balanced than the index which is reliant on US mega cap technology companies to continue to drive performance.
  • Smaller capitalisation opportunities (below $10bn.) are typically reserved for the Heriot Global Smaller companies fund which is run to the same dividend growth strategy.
Dundas Global Investors, Bloomberg, Tideway 31st May 2024

Source: Dundas Global Investors, Bloomberg, Tideway 31st May 2024


  • Since inception of the Heriot Global fund in March 2013, the companies on average have grown their dividends by 11% per annum and the share prices have increased by 11% per annum, net of all fees to the end of March 2024.
  • Although past performance is not a guide to future returns, the above is why we think dividend growth is a good barometer of where share prices could go in the future.
  • We think ongoing evidence of dividend growth of the portfolio of companies is crucial for investors, who are perhaps tempted to crystallise losses when market sentiment is poor and share prices are falling.
  • Studies have shown that those who do not have conviction in their strategy, or know why they are holding a fund, either active or passive, are likely to make poor moves at the wrong time and destroying capital.
  • Performance is in line with the MSCI World All countries world index net of all fees and is in excess of the IA Global Sector average which has returned 9.74% of the same period.
  • Irrespective of what benchmarks have done, an 11% annualised return equates to doubling your money every 6.5 years.
  • The content of this document is for information purposes only and should not be construed as financial advice.
  • Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
  • We always recommend that you seek professional regulated financial advice before investing