The Truth about Active Investing
Active strategies can seek to uncover value and defend gains in a market where little is cheap.
Active strategies offer tremendous flexibility to address specific financial needs - both on their own and as complements to passive strategies within a well-diversified portfolio.
WHAT ACTIVE DOES BEST
Unlike passive strategies, active strategies can adjust holdings to limit the impact of market drawdowns, helping to preserve capital during adverse conditions.
Short-term prices don’t always reflect long-term value – creating opportunity for active managers with the skill and patience to identify assets with the potential to appreciate.
Focus on Outcomes
Investors who have specific needs (such as retirement income, portfolio diversification, or particular level of return) can turn to active strategies tailored to those needs.
WHEN ACTIVE MAY HAVE THE ADVANTAGE
A Favorable Shift?
Equity markets have been moving in a direction that could favor active managers in the near term. After an extended period when stocks, sectors and even asset classes tended to rise and fall in tandem, that trend has weakened. Correlations between sectors have declined substantially over the past year.
That means greater dispersion in the performance of individual stocks, with winners and losers more sharply defined. It also creates opportunity for active managers who create value through selective portfolio choices, rather than tracking the whole market.
Fixed-income conditions are also changing. With global growth improving, central banks in the U.S. and Europe are poised to scale back stimulative policies. Yet in emerging markets, many central banks are preparing to do the opposite, as inflation becomes less of a threat. This divergence could encourage greater dispersion in performance—and new ways for active managers with global expertise to seek return.
Post-Crisis Correlations Have Declined since 2016
S&P 500 Average Sector Cross-Correlation
Source: Bloomberg, as of 10/31/17. Based on daily changes in S&P 500 GICS Level 1 sector indexes. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
PASSIVE HAS RISKS, TOO
Many investors mistake passive strategies as being somehow “safer” than their active counterparts. But all investments have risks, and it’s important to recognize those specific to the indexes tracked by passive strategies. In equities, the S&P 500 is heavily tilted toward a handful of stocks. In bonds, the Barclays Bloomberg U.S. Aggregate Index is concentrated in sovereign debt, like Treasuries, that have relatively high duration risk.
FLEXIBILITY IN TIMES OF VOLATILITY
The value of active strategies’ ability to act differently than an index is never clearer than when markets are challenged by volatility. After all, passive strategies capture all an index’s gains – but also all its losses when times are tough. Active managers, in contrast, can proactively shift positions during declines to seek shelter and better preservation of capital.
Investment InsightsDecember 15, 2017
Active management does not ensure gains or protect against market declines.
All investments involve risk, including loss of principal. Past performance is no guarantee of future results.