Active management – Cover story
No investment strategy has experienced as many failed attempts to revive it from the dead in the past decade as active management. Since 2008’s financial crisis, the markets have been dominated by central bank intervention and as such has lost touch with fundamental valuations. With quantitative easing and ultra- loose monetary policy persistently inflating asset prices, it has been hard to beat the index. But despite such challenging conditions, every so often a pun- dit, usually someone selling actively managed funds, predicts a comeback. They have largely been proved wrong, but in the first quarter of last year a major bout of volatility hit the mar- kets as the Covid-19 pandemic unfolded, giving active manag- ers a long-awaited chance to prove their worth.
Stress test March 2020 was a challenging time for investors with stock markets reporting their fastest transition to a bear market on record. Indeed, it only took 22 trading days for the S&P500 to lose a third of its value.
During such market shocks, conventional wisdom dictates that protection-seeking investors should turn to fund managers who operate independently of benchmark indices. But during the volatility caused by the global health scare, they did not. Instead, investors paradoxically turned towards passive equi- ties, says Dewi John, Refinitiv’s head of research in the UK and Ireland. “For March 2020, our fund flow figures show almost symmet- rical outflows out of passive bond funds and into passive equi- ties,” he adds. For John, one possible explanation for this short-term move- ment could be liquidity, rather than performance. “If you are in a volatile market, you are going to have to move assets around quite quickly and that is a lot easier to realise with large cap liq- uid passives, which are famously used as trading instruments.
“The interesting thing is that looking over the data on a month- on-month basis, passive hasn’t had a single negative month across all asset classes whereas active has had some very nega- tive months,” he adds. “Each time money has been withdrawn from markets, particularly in March, it has come far more heavily from actively managed funds and when that money has been redeployed it has been in general redeployed more into passive vehicles than into active ones, and that is true across all asset classes. “If anything, the past year has strengthened the trend towards passive investing.” Morningstar’s data shows why this may have happened. Its study of some 4,400 active and passive funds, concluded that in the first half of 2020 some 60% of actively managed bond
Issue 100 | February 2021 | portfolio institutional | 17
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