AllianceBernstein head of equities Sharon Fay said investors may be skeptical about the ability of active managers to consistently beat a benchmark but there are plenty of good reasons for an active approach, visible simply by looking at the markets.
Ms Fay said active strategies enable investment managers to avoid expensive stocks, unlike passive strategies where they continue to be held in a benchmark.
“Even after the decline in high momentum stocks this year, many internet and biotech names aren’t cheap,” said Ms Fay.
“An active manager can think twice about owning a stock trading at an exponential multiple to its future earnings or decide to focus on specific companies where the disruption potential appears to justify the valuation.”
Ms Fay also argued that active managers can fine tune their exposures in response to a rising rate environment and “navigate political risk”.
“There’s no such thing as an exchange-traded fund that can prepare for or react to an unfolding political crisis, whether in Ukraine, the Middle East or Washington,” she said.
Ms Fay also pointed out that many industries face disruption as a result of technological change.
“Remember Blockbuster video or Kodak? Today, countless large, benchmark companies are facing similar threats to traditional businesses, from shoemakers in China to banks around the world,” she said.
“Benchmarks aren’t very good at keeping away from tomorrow’s Blockbuster.”
Ms Fay said bubbles were perhaps the “classic passive flaw”.
She referred to examples such as when the US sector ballooned 27 per cent of the S&P500 and when the technology sector accounted for 29 per cent of the index in 1999.
“Both sectors collapsed in the subsequent two years,” she said.
“Active investors should always be on the lookout for the next market bubble; you never know where one might pop up. For example, real estate investment trusts now comprise almost 9 per cent of the US small-cap index — toward the high end of its 10-year history.”
Ms Fay also explained some of the opportunities that can be captured through active strategies, such as benefiting from “the cutting edge companies of tomorrow, adjusting to economic recovery and finding higher revenue growth”.
She also believes active managers are able to exploit less intensively researched universes, such as small and mid-cap stocks, since these companies receive less coverage by analysts.
“The return and diversification potential from companies in frontier markets can’t be obtained in a typical emerging markets benchmark,” she argued.
