Investors who have piled into passive strategies will be in for a painful shock if “fully priced” markets crash, says Zenith.
Speaking to InvestorDaily, Zenith Investment Partners managing partner David Wright said a market downturn would be especially damaging for passively managed portfolios.
"Because we've had such low volatility and for a long time now, there's a bit of investor apathy at the moment," Mr Wright said.
Many investors holding passive products are labouring under the impression that "this is actually quite easy", he said.
"When we do have more volatility and/or a downturn, that's going to be quite painful for a lot of people who have positioned passively," Mr Wright said.
"The markets are pretty precariously balanced if we have a left-field event. Most things are priced for perfection.
"People need to realise that the central bank intervention has really depressed volatility that that has led to a large part of the beta [passive] rally."
Mr Wright said it is hardly surprising that passive investment strategies are sitting at the top of performance tables, given that markets are at the end of an extended bull run.
Most active managers worth their salt will not be participating in markets when valuations are sky-high, he said.
Fortunately, most of the advice community has come to the realisation that most asset classes are "fully priced to expensive", he said – which has driven demand for alternative strategies over the past year.
"For the first time since the GFC, we've seen some genuine product issuance in alternatives. New global macro product, a couple of currency products and multi factor real return funds," Mr Wright said.
But he was not confident that investors – advised or not – are appropriately positioned to withstand the effects of another GFC.
"The problem you have with investment markets is that you have a different generation of investors [during each crisis]. So they can read about past corrections, but until you've been through [a correction] yourself you don't properly learn," Mr Wright said.
That said, it has been encouraging to see markets quickly bounce back after geopolitical shocks like Brexit, the Trump election and various terrorist attacks, he said.
"The ability to generate returns at the moment is relying a lot on relative value trades. So where a market corrects people have piled in and taken advantage of it," Mr Wright said.
"It's not that clear where a major catalyst for a correction in market is going to come from."