1. Newsroom
  2. Active management makes a comeback
Menu
Analisi 02.03.2017

Active management makes a comeback

Active management makes a comeback

Correlation between asset classes is falling towards normal levels. The recent rise in bond yields and monetary policy normalisation are causing much wider variations between asset classes in terms of their behaviour and returns. Now that these differences are reasserting themselves, active management is likely to outperform passive management.


Passive management, or index-tracking, became much more popular following the financial crisis. A high level of correlation between the various asset classes between 2008 and 2016 worked in favour of the passive investment approach. During that long post-recession recovery period, inflows of liquidity into the markets along with low bond yields, driven by ultra-loose monetary policies, encouraged large-scale buying by investors.

Yield-seeking investors pumped money fairly indiscriminately into segments deemed likely to deliver returns higher than the traditional risk-free rate. As a result, the main asset allocation decisions involved investing in riskier bonds and in equities. As indexes rebounded from their lows, equity investments took place mainly through index-tracking ETFs to the extent that global assets under management in ETFs rose from $750 billion in 2008 to almost $3,500 billion in 2016. The outperformance of the major indexes was self-sustaining, not because of the fundamentals but mainly as a result of money flowing into ETFs.

Market behaviour is returning to normal and decorrelation is making a comeback

Now, however, active management is set to see a resurgence among equity investors. Correlation between stocks is falling towards normal levels, since the recent increase in bond yields and monetary policy normalisation are causing investments to show widely varying behaviour and returns depending on the fundamentals. This means that stock selection is once again adding value, including within individual sectors, since it enables investors to take advantage of sector or style rotation.

As regards style, for example, a "value" stock automatically becomes more like a "growth" stock if its price rises, all other things being equal. As a result, to maintain a pure value strategy, an asset manager needs to take a fairly dynamic approach, refreshing the portfolio regularly by taking profits on holdings that have become growth stocks and reinvesting the proceeds in other stocks that are trading at an unjustified discount. Passive managers only make these kinds of returns-enhancing switches once per year, when the index they are tracking is reconstituted.

Positive momentum for US mid-caps: an argument in favour of active management

Finally, the new US economic policy landscape will also affect the way investors view markets. Tax-based stimulus, massive public-sector infrastructure investment and policies to boost domestic activity in the USA should primarily benefit small- and mid-caps, which have historically been more sensitive to domestic economic growth. Since 1926, the 10 phases of Fed rate hikes – synonymous with economic recoveries – have seen small-caps outperform blue chips. In the 12 months following Fed funds rate hikes, small-caps have returned 14.5% as opposed to 10.5% for large-caps.

And if there is any area in which active management is vital to achieve good returns, it is the small- and mid-cap segment. All of this means that active management is about to make a comeback.


FALLER Nicolas.jpg

Nicolas Faller
co-CEO of Asset Management

 

Analisi

Gestione discrezionale – le redini sono in mano vostra

Ogni cliente ha aspirazioni e obiettivi unici, così come è unico il nostro approccio alla gestione di portafoglio discrezionale.

Leggete di più
Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Le news più lette

Analisi 10.02.2021

COVID-19: UBP vi terrà aggiornati

Dalla comparsa del coronavirus, UBP accompagna e sostiene i suoi clienti nel contesto inedito di questa crisi sanitaria mondiale. La Banca vi aggiorna regolarmente sull’adeguamento dei suoi piani alle regole precauzionali fissate dalle autorità e condivide con voi le più aggiornate analisi dei suoi esperti sulle conseguenze della pandemia per l’economia mondiale e i mercati finanziari.

Analisi 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

Analisi 17.12.2020

UBP Investment Outlook 2021

Il mondo nuovo

Altro da leggere

Analisi 04.03.2021

Benefiting from trends in thematic investing

At UBP, thematic investing means devising investment strategies that benefit from megatrends, such as the disruptive forces that are reshaping our economy and our society.

Analisi 03.03.2021

Investing amidst a tantrum in US Bond Markets

US 10-year Treasury yields have risen 110 bps from their July, 2020 lows and 60 bps alone in 2021. Using previous bond market ‘tantrums’ going back to 2008 as a reference, a rise to as much as 1.7-2.5% may still lie ahead should the turmoil resume.

Analisi 01.03.2021

Gestione discrezionale – le redini sono in mano vostra

Ogni cliente ha aspirazioni e obiettivi unici, così come è unico il nostro approccio alla gestione di portafoglio discrezionale.