During the last decade, passive strategies have grown significantly in popularity, particularly during the period of steady, upward trending markets.
But Paras Anand, Asia Pacific chief investment officer for Fidelity has said as the market shifts into its next phase with ongoing turbulence, the past success of passive tracking methodologies is set to be wound back.
“The high level of volatility means for trackers or any tracking methodology is harder to get the index return, meaning the tracking error for passive strategies increases,” Mr Anand said.
“You’ll see a higher degree of underperformance or greater challenges for trackers to replicate their market indices.”
He added two other factors will help active managers do better.
“The consequence of there being more passive money in the markets, is we are seeing much bigger dislocation between the price of securities and their fundamental value,” Mr Anand commented.
“We are seeing as active investors, more value dislocation in the market today than we could see at any time previously. The return opportunity to active selection we feel is higher today than at any time in recent history.
“With the consequences we are seeing around some of the real pressure happening at the corporate level, the ability to make distinctions between different underlying companies and securities, I think is going to be a source of real return for our end clients. Another way of expressing that is that the return from omission i.e. the returns from exclusion, we see as being as high if not higher, than the returns from commission, i.e. the returns from inclusion.”
Similarly, Ariel Investments CIO Rupal Bhansali called the rise of the active manager while speaking at a Women in Super event in February.
“This notion that passive is a panacea, that you can just put your money in the benchmark – that may work in a bull market when you don’t have to think about anything but God help you if you’re in Japan and you put money in passive,” Ms Bhansali said.
“People are not used to the notion that markets can fall because they’ve only gone up for the last 11 years. This is exactly the thought process that prevailed in 1999 when growth was succeeding, people said value was dead.
“Trust me, I was there at that time too. I was vilified as an active manager. Growth was working over value. Momentum was working over contrarian. God help me. And yet we held our own.”
She added active managers have strength in being able to see the turning point across stocks and sectors, where future returns diverge from the past.
“You better be aware of those inflection points,” Ms Bhansali said.
“Passive cannot do it, quantum does not do it. Active can do it, figure it out. Is the future going to look different in the past? And [they will be able to say] this is where I’m pulling out.”
