Did active management hold up during first-quarter volatility?
Results from our quarterly survey of active managers
Despite volatility, active managers performed well
Volatility may have rattled investors’ nerves during a rocky first quarter for markets, but did those with their assets in the hands of an active manager sleep better at night?
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 — a figure that was even higher outside of the U.S. In other words, on a global scale, the majority outperformed.
Why did active managers outperform?
Growth stocks, strong earnings and technology
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 were generally overweight 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.
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 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
Protecting against the downside
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.
Active manager survey results: By region
Following are the results of our active manager performance assessment for each equity region surveyed. Additional details are available in the press release on our website.
- 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 Emerging Market 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.
Does active management make a difference?
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 31 March 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.
Albert Lim, Senior Research Analyst, U.S. Equity Research