We are at that time of the year where you get inundated with 2017 predictions. Where will the S&P 500 end? Where will the 10 Year treasury end? Rather than saturate your inbox with more feeble year end predictions on specific markets – I will make just one bold prediction – that 2017 is the year Active Managers will shine.
I discussed this briefly on Bloomberg TV yesterday.
My view that 2017 will be the year of the “active” over the “passive” is predicated on two driving forces: Necessity and Opportunity.
Necessity
Let’s start with the less palatable reason – necessity. I can remember back 25 years ago and investors and the media were questioning active management versus passive management. That debate isn’t necessarily new, but it seems to have accelerated in the past two years. With a proliferation of ‘smart beta’ (which I often think is stupid) and other passive tools – the competition for investment dollars has been fear. The ‘Robo’ advisors have certainly helped fuel flows into passive strategies.
From my conversations with investors and allocators, I remain convinced that there is a willingness (and even a desire) to pay for performance – so performance is what Active Managers need to try and deliver in 2017.
As fund flows have accelerated into passive strategies, it is no longer acceptable to be a ‘closet index hugger’ or a hedge fund doing ‘just enough’ to keep the AUM withdrawals down.
The necessity to perform is high – and I believe that necessity will actually increase risk taking and trading. It will force managers to look even harder for that extra edge. The battle lines between passive and active have been drawn and it is time for active to truly fight back.
Opportunity
Many have argued that just like location, location and location are the three biggest drivers in real estate transactions, financial market’s three biggest drivers have been central banks, central banks and central banks.
That is changing. We are entering a period where there seems to be a multitude of drivers
- Central banks pulling back (ECB and FED)
- Central banks still supportive (BOJ)
- The Trump Presidency
- Infrastructure
- Tax policy
- Foreign Policy
- Brexit, Italy, France and a slumping Merkel changing the political landscape in Europe
- The always inscrutable Chinese economy – with signs of growth (rising commodity prices) but also some good ‘fear’ stories (bank and credit issues)
The complexity of these competing factors should allow investment managers to evaluate the opportunities, identify what is overdone or not, in a more traditional framework.
Every year I’m told ‘this will be a stock pickers market’, well, with stocks at highs, some valuations apparently stretched, other sectors out of favor – maybe, just maybe, this will be the proverbial ‘stock pickers’ market.
I believe that the complexity of markets that we are going to be navigating in 2017 provide the opportunity for active managers to excel at
- Asset Class and Sector Selection
- Vehicle Selection (stocks, bonds, ETFs, options, etc.)
- Specific stock and bond selection
It won’t be easy. There will periods of being wrong even for those who wind up being right (and some will just get it wrong) but necessity is going to drive that chase for performance more than we’ve seen recently and many will succeed (and hopefully we at Brean will be a part of that success).
Stupid Beta
The competition in this battle can be quite stupid.
So-called ‘smart’ beta tends to rely heavily on what has happened – not what will happen.
While none of us can predict the future, relying heavily on models or things that worked in the past can leave some glaring holes in a strategy.
One of my least favorite trades starting in the second quarter was with the market’s “love affair’ with low volatility and minimum volatility strategies. It sounded almost too good to be true – and it was.
The success of the strategy sowed the seeds of its own destruction – or underperformance, with the late summer the most frustrating for investors as overall markets went up, but the supposedly ‘safe’ stocks went down.
Low Vol ETF (SPLV) versus S&P 500 (SPY) in H2 2016
There will be opportunities to exploit these passive strategies in every asset class – timing will be crucial as the momentum behind a move can be powerful, so being early to calling a top (or bottom) can be deathly – but passive isn’t perfect and the ‘smarter the beta’ the harder it falls.
I wish all money managers, RIA's and investors all the best for 2017!
Disclaimer: The content provided is property of Peter Tchir and any views or opinions expressed herein are those solely of Peter Tchir. This information is for educational and/or entertainment purposes only, so use this information at your own risk. Peter Tchir is not a broker-dealer, legal advisor, tax advisor, accounting advisor or investment advisor of any kind, and does not recommend or advise on the suitability of any trade or investment, nor provide legal, tax or any other investment advice.
