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Why the tide could be turning for active managers

18 January 2018

Fidelity International multi-asset manager Ayesha Akbar explains why now might be a good time to revisit active strategies.

By Rob Langston,

News editor, FE Trustnet

Investors should re-consider active managers in preparation for the end of the cycle as they are more likely to outperform when market correlations fall, according to Fidelity International’s Ayesha Akbar.

The high fees charges by active managers have come under greater scrutiny in recent years as markets have risen across the board and flows into passive strategies have surged.

Akbar, a portfolio manager within Fidelity’s multi-asset team, said the past decade “had not been pretty for active manager performance”.

“Active managers, who depend on exploiting low stock correlations and the difference between stocks, have faced significant headwinds to performance with broad forces dominating markets,” she explained.

“Stocks have tended to sell off or rise in unison, with investors focusing on factors like geopolitics, or the outlook for the economy and monetary policy.

“The idea of the central bank input – the belief that central banks will backstop markets – has been the animating force of today’s bull market.”

 

Rebased to year-end 1998. Active US equity funds’ performance relative to the market – scores below 1 indicate underperformance.

Source: Fidelity International

Both the Federal Reserve and European Central Bank have signalled the quantitative easing programmes that have flooded the market with cash may be coming to an end a decade after the onset of the global financial crisis.

However, Akbar said active performance seems to have “turned a corner” in the past year, highlighting data from S&P Dow Jones indices, which shows almost half of all US large cap managers have outperformed the S&P 500 index in the 12 months to the end of June 2017.

Indeed, the one-year data represents an improvement on longer-term performance, with just one in five active managers outperforming the index over the previous five years.


 

Akbar said: “Low economic volatility has underpinned falling stock correlations, with the global economy enjoying its strongest period of growth since the financial crisis.

“Is this just a temporary phenomenon, or should investors allocate back to active managers in the hope of better performance in the future?”

Additionally, the multi-asset manager said the correlation between stock markets and the outlook for global economic growth could remain low, thereby boosting the outperformance potential for active strategies.

Akbar said forecasts from the OECD (Organisation for Economic Cooperation and Development) suggested every economy was forecast to grow in 2017 for the first time since 2007.

“Synchronised global growth usually indicates more robust growth, and while economies like the US are at a late stage of the economic cycle, others like the eurozone are at a much earlier stage, and are benefiting from several years of pent-up demand,” she said.

However, this has been stymied by the disappearance of the driving forces behind markets more recently.

“Most importantly, robust economic growth is allowing central banks to step back from markets,” she explained. “The Federal Reserve is poised to stop the reinvestment of its balance sheet while the European Central Bank has announced a reduced volume of asset purchases this year.”

A decline in factor correlations – between different investment styles such as value and growth – may also support active managers as the end of the cycle draws near, said Akbar.

Source: Bernstein

“Factor correlations have not declined as much as stock correlations over the past year, and remain above their post-crisis lows,” she said.

“One reason for this is the failure of valuation spreads to revert to the mean – in other words, for the spread between the average prices of cheap and expensive stocks to narrow.

“Valuation spreads remain high by historic standards, so there is significant potential for this to contribute to active outperformance.”


 

The manager said the only factor likely to swing back in favour of active management is the momentum trade.

“This has traditionally been a strong source of alpha, as it is relatively easy for active managers to exploit the tendency for high-performing stocks to keep on winning,” she continued.

“But momentum-targeting smart beta products have been growing in popularity and active managers can no longer rely on momentum to the same extent.”

Summarising, Akbar said that as long as economic growth remains strong, “it seems reasonable to expect better performance from active managers, and even for a majority to start outperforming their benchmarks”.

She added: “Investors will still need to choose their exposure carefully, of course. But with equity returns likely to be muted after several years of strong beta performance, tactically allocating to active strategies might be a smart move.”

 

Akbar became sole manager of the Fidelity Multi Asset range in October last year. This includes the four FE Crown-rated Fidelity Multi Asset Defensive and Multi Asset Strategic funds. She also oversees the Fidelity Multi Asset Adventurous and Fidelity Multi Asset Growth funds.

Performance of fund vs sector in 2017

 

Source: FE Analytics

The largest fund, Fidelity Multi Asset Strategic, underperformed the IA Mixed Investment 20-60% Shares sector in 2017, delivering a total return of 4.23 per cent compared with a 7.16 per cent gain from its average peer, as the above chart shows. The £618m fund has an ongoing charges figure (OCF) of 1.05 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.