2018 Is Active Management’s Comeback Year

Traders Magazine Online News, May 3, 2018

Terry Flynn

There is no arguing that 2017 was a particularly rough ride for active managers, who faced continued disruption from several directions. From technology innovation, to a deluge of regulation, and the encroaching growth of alternative asset managers, elbowing their way into private debt and other sources of illiquid alpha. And let’s not forget the elephant in the room; the reign of passive investment.

Actively managed funds have struggled in recent years to varying degrees across the globe. According to the much anticipated 2017 SPIVA U.S. Scorecard from S&P Dow Jones Indices, some 66 percent of large-cap active managers in the US failed to top the S&P 500 in 2016. It’s no surprise then, that active managers continue to experience record outflows, as investors persist in pouring money into the booming global market of passive and smart beta Exchange Traded Funds, now over two decades old and worth an estimated $2.9 trillion (Financial Times, 2017). Asset Owners have shown a clear preference for these transparent, low cost investment vehicles, affording them access to diversified range of asset classes, with satisfying returns.

Moreover, the surge in Smart Beta ETFs, which provide many of the same benefits as index-based investing, with the addition of an alternatively-weighted or strategy bias, offer the investor a cheaper, hybrid alternative to actively managed funds. In fact, in the last two years we’ve even seen fund houses muscle in on the action. The latest entrants into the Smart Beta arena include JP Morgan Asset Management and Fidelity International.  

The question on everybody’s lips; Is this the end for active managers? The answer is No, far from it. The tide is swiftly turning. We now see heightened volatility, evidenced with the recent spike in the VIX. We have also seen the Federal Reserve raise interest rates to 1.75% with hints that more hikes are to come. And then there’s decreasing liquidity, caused by central banks pulling back from monetary measures like Quantitative Easing (QE). All of this bodes well for the active manager to make a comeback.  

Combined, these factors have already panicked many investors in the first quarter of 2018. Just weeks ago, Traders Magazine reported that February marked the US ETF industry’s first monthly outflow in two years. And it continued in March. State Street Global Advisor’s latest ETF report estimates the outflows at $1.7 billion. The first consecutive monthly outflows since February 2008. Does that year sound familiar?  

And this panic behaviour is set to continue if veteran Manager, Mark Mobius’ recent prediction is anything to go by. Having predicted the start of the bull market back in 2009, Mobius is now prophesying an impending market correction of around 30%. What’s interesting is that if this were to happen, the scale of it would be magnified by the mass pull out from the very ETFs that have been seen as low-risk.  

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