Did active management hold up during first-quarter volatility?

The results from our quarterly survey of active management performance suggest the answer is yes.

We reviewed 1,200 institutional money manager products monitored by our global equity research team during the first three months of 2018, and the numbers are telling. Across all regions, more than half of the products assessed beat their respective benchmarks.

Source: Russell Investments research.

Why?

A major reason was the continued gains seen in growth stocks globally, buoyed by strong earnings results from growth companies. This was especially true for technology stocks, where active managers benefitted from overweight positions, particularly in Canada and Australia as well as in global and international equities. The same also held true for U.S. small cap equity managers, which generally overweighted equities in the technology sector. While this turned around a bit once the calendar flipped to April, our research shows that many managers continue to anticipate modest earnings growth moving forward—something that typically benefits growth stocks as earnings growth becomes scarce.

Seizing the moment amid market drops

In addition, some active managers were able to take advantage of downturns in the market to add high-quality stocks at more reasonable valuations. This is a feature of active management that we can’t emphasise enough. Why? Markets change on a daily basis, sometimes dramatically so, as recent months have proved. Being able to potentially benefit from a change in conditions—in this case, buying the dips—requires both nimbleness and dexterity. At Russell Investments, we call this dynamic portfolio management, and it means exactly what it sounds like. When markets sour, the ability to make portfolio changes on a dime or implement an overlay-based strategy at the drop of a hat isn’t just a nice-to-have. We believe it’s a must, especially in today’s low-return environment, where we believe no stone can afford to be left unturned in the search for additional market returns.

A ramp up in defensive positions

Of course, it isn’t all about buying low and selling high. It’s also about protecting against the downside. Yes, Feb. 5 has come and gone, but markets remain volatile, and it’s no secret that today’s bull market is quite long in the tooth. At some point—perhaps within the next 12 to 18 months—we believe markets may begin to price in recession risks, and the beginning of the end for the second-longest bull market on record1 may be set in motion.

Underscoring this point, we saw a general shift to a more cautious stance among active managers compared to a year ago. U.S. large-cap active managers, for instance, were slightly more defensive relative to their 2017 positioning, though they remained pro-cyclically positioned overall. This led to a rotation into consumer staples and telecom stocks, which are traditionally more defensively-oriented. By this, we mean they are typically less likely to experience steep drop-offs in price, due to continuous demand for the products these companies produce and/or deliver (such as food, medicine and cell phone service), regardless of the state of the economy. In addition, we’ve seen more managers consider these stocks due to their reasonable valuations, particularly following a few years of lagging returns relative to other sectors.

Results by region

Following are the results of our active manager performance assessment for each equity region surveyed. Additional details are available in our press release.

  • U.S. large cap equities
    50% of active U.S. large-cap products outperformed the Russell 1000® Index.
  • U.S. small cap equities
    45% of active U.S. small-cap products outperformed the Russell 2000® Index.
  • Global / international equities
    60% of active global products outperformed the MSCI All-Country World Index, while about 80% of international equity products outperformed the MSCI World ex-U.S. Index.
  • UK and European equities
    75% of active European products outperformed the MSCI Europe Index, while about 80% of active UK products outperformed the MSCI UK Index.
  • Emerging markets equities
    65% of active EM equity products outperformed the MSCI Emerging Markets Index.
  • Japanese equities
    50% of active Japanese equity products outperformed the Tokyo Price Index (TOPIX).
  • Australian equities
    65% of active Australian equity products outperformed the S&P/ASX 300 Index.
  • Canadian equity
    75% of active large-cap Canadian equity products outperformed the S&P/TSX Composite Index.

The wrap

So, can active management really make a difference during times of market volatility? The numbers are in from one of the most volatile quarters in recent years. And we believe they speak for themselves.

Note: Percentages cited in this review are rounded to the nearest 5%, as of March 31, 2018, because data from a small percentage of third-party investment managers in the firm’s universe are not available as of this cut-off date. In previous quarters the subsequent addition of these later-reporting products has not materially changed our research analysts’ preliminary assessment. In addition, all percentages cited for specific regions are assessed using the local currency. Any observations included in this assessment are based on a sampling of available information as of the cut-off date.

Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

The MSCI All Country World Index (ACWI) is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets.

The Russell 1000® Index is a U.S. large-cap stock market index, which typically comprises approximately 90% of the total market capitalization of all listed U.S. stocks. The Russell 2000® Index is a U.S. small-cap stock market index. The Russell U.S. Indexes are owned by London Stock Exchange Group.

The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange.

The S&P/ASX 300 is designed to provide investors with broad exposure to the Australian equity market. The index is liquid and float-adjusted, and it measures up to 300 of Australia’s largest securities by float-adjusted market capitalization.

The S&P/TSX Composite is the headline index for the Canadian equity market. It is the broadest in the S&P/TSX family. The Toronto Stock Exchange (TSX) serves as the distributor of both real-time and historical data for this index.


1 Source: https://www.cnbc.com/2018/03/08/the-bull-market-just-turned-9-years-old-heres-how-the-stock-surge-compares-with-past-runs.html

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