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What We’re Reading Now

What We’re Reading Now

April 7, 2021

Stockpickers Can Breathe Again as FANGs StumbleBloomberg  

John Authers, a journalist who is generally skeptical of active management suggests the recent market turbulence has spurred a revival for active fund managers but questions  how long it can last.

“Stockpickers need dispersion … As we have seen of late, dispersion has been its highest since the global financial crisis, and it remains above its long-term average … This has indeed translated into a spectacular change in active managers’ fortunes. In February, 72% of U.S. active managers beat their benchmark, according to BofA. Among growth managers, an amazing 94% beat the growth benchmark, possibly because they were virtually all underweight in Tesla Inc.”

“Despite this, many people do exactly that. In the quite possible event that dispersion remains high with low correlation for another few months, there is that much more chance of a shift toward active managers again. That could be a big deal.” 

Willis Towers Watson Urges Shift from Passive to Active Management – Financial Times 

One of the world’s largest investment consultants, Willis Towers Watson has been raising concerns about concentrated risks in passive investing for several years, has changed its position and is now advocating for active management.   

Luba Nikulina, global head of manager research at Willis Towers Watson, said that in the US market, where there have been the largest inflows, passive investing was “very concentrated” in the small number of companies investors are exposed to.

In the S&P 500, “including Apple, Microsoft, Amazon, Facebook, Google and Tesla, account for almost a quarter of the index and the bulk of returns,” she said.

Furthermore, negative climate change implications for passive investing and more favorable conditions for active investing are also arguments for a shift to active; precisely the message the Active Managers Council has been delivering in interviews with reporters covering sustainable investing. 

Willis Towers Watson isn’t the only consultant seeing a shift.

“”The stance we take is passive has its place,”” said Jo Holden, UK chief investment officer at Mercer. He added: “”We firmly believe in high-conviction active management, and the investment themes playing out over the next couple of years lead us to think there could be quite a high dispersion of returns across countries.”” 

Covid-19 Fueled Stock Market Selloff Last Year. Here Are Some Lessons Learned.Wall Street Journal  

The feeling that markets are moving faster than ever should be a boon to active managers. Analysts have long argued that the professionals have the best opportunity to prove themselves when there is plenty of dispersion.

Akan Otani of The Wall Street Journal asks – Will stock pickers buck the trend in 2021? So far, they’re off to a good start. Bank of America found 70% of U.S. large-cap mutual funds beat their benchmarks in February, the highest share since 2007. 

“The growth versus value debate has played out countless times over the past decade, with little reward for value investors. But with rising interest rates putting pressure on long-loved corners of the market, money managers like John Allen, chief investment officer of Aspiriant, are feeling hopeful.”

“We believe this is going to be a decade where active investing prevails,” he says.

The Case for Actively Managed ETFs in 2021ETF Trends

Active managers have taken some lumps in recent years, but many market observers believe that active opportunities will shine in 2021.

Data suggest some investors are preparing for that renaissance. In February, actively managed ETFs topped $200 billion in combined AUM – a sign investors are still fond of this management style.

However, recent equity market bullishness doesn’t erase the need for downside protection. Active management can be the best avenue for investors seeking that buffer.

“Active returns in 2021 might therefore benefit from the improved relative performance of smaller names and the generally higher level of dispersion, without bearing dramatically higher levels of incremental volatility. If these trends continue, then 2021 might at last be the year when active management reaches its sunlit uplands,” concludes Craig Lazzara at S&P Dow Jones Indices. 

Active Beats Passive for Downside Protection, Advisors Say Financial Advisor

The majority of financial advisors are betting on active management over passive to reap rewards this year, according to a PGIM survey, “On the Minds of Advisors.”

The survey finds, “the majority (61%) of advisors feel actively managed investment products are better suited than passive to protect against any market declines that occur this year. Only 13% said passively managed accounts were better to protect against any downturns.”

“Whether they support active or passive management, 79% of advisors said they are optimistic about equities this year, although their forecasts varied by type of advisor.”

To conclude, “fixed-income managers said the bond market will be attractive for longer-term time horizons, but over the near term, the market is likely to remain volatile. Because of this, actively managed credit selection will be a differentiating factor between managers, according to the survey.”

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