Downturn may impact index funds

— 1 minute read
A preference for active fund managers may be the result of equity markets failing to rebound rapidly.
A pr
olonged downturn in equity markets worldwide could see investors gravitate towards actively managed funds in order to source better returns, according to the head of a boutique fund manager.

"After 1987 there were a lot of changes and no one had ever thought about indexing, especially in Australia ... after 1987 indexing became quite an interesting concept," Instreet managing director George Lucas said.

"But what we'll find after this is everybody will go back to active managers and move away from indexing." 

Investing in an index fund makes no sense if the market suffers poor performance over a long period because any real opportunity to boost returns will lie outside of the index, according to Lucas.

As such he feels investors might decide to back higher conviction managers who select better performing individual stocks to source the greatest market returns.

"If the market picks up and starts moving up again, being in an index fund makes sense because you hold the market," he said.

The current investment climate may also see investors moving away from fixed interest as a defensive asset, Lucas said.

"People have discovered that equities and bonds were not as uncorrelated as everyone had hoped," he said.

"Correlation and diversification really only works in orderly, calm markets, and in times of stress the correlations will go to one.

"So people are asking how do I actually really generate uncorrelated assets an they can really only do this by employing alternative strategies like shorting."


Downturn may impact index funds
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