You are here: Home - Investing - Experienced Investor - News -

Environment for active investing set to improve markedly

0
Written by: John Bilton
27/01/2017
The last few years have been tough for active investors, but as interest rates around the world start to stabilise the outflows from active funds will level off and begin to reverse.

Fashions wax and wane in investing as much as in any other field. But one fashion that many commentators believe is more than a passing fad is passive investing. So much so, that some would extrapolate the explosive growth of passive funds in the last few years and predict the ultimate demise of active investing all together. But to borrow some words from Mark Twain: reports of the death of active investing are greatly exaggerated.

Without question, the last few years have been tough for active investors – adapting to a new monetary policy landscape which flooded markets with cheap capital and caused asset prices to surge largely indiscriminately proved tough.

Excess capital, it seems, is like kryptonite to alpha. It removed competition for capital and constrained the ability of active managers to ration investment to more deserving assets. But all this may now be changing as interest rates around the world start to stabilise and grind slowly upwards.

Another important consideration is that for much of the last seven years, the daily and even weekly returns of stocks and bonds were negatively correlated – good days for stocks were bad days for bonds, and vice versa. Longer term annual returns for the two assets however, were largely positively correlated – total annual returns for US stocks and bonds were positive for both assets in six of the last seven years.

This situation allowed investors to hold a passive allocation to stocks and bonds which both dampened day-to-day portfolio volatility and delivered positive annual returns from both assets over the longer run.

We doubt the benign environment of the last few years, which provided a significant tailwind for passive investing at the same time that it frustrated active managers’ quest for alpha, will persist. As central banks gradually drain excess liquidity, and we enter the more familiar latter stages of a business cycle we expect the environment for active investing will improve markedly.

To be clear, we do not expect a sharp reversal of asset flows to passive funds as the environment shifts; but we do anticipate that the outflows from active funds will level off and begin to reverse.

A key driver of this is the business cycle – there is little question that the current business cycle is elongated. We see a very real prospect that the current expansion could set a new record, ultimately outlasting the 1991-2001 expansion in the US.

However, we are clearly morphing from a “lower for longer” bias – which supported all assets and flooded the market with cheap capital – to a “reflationary” bias. In a reflationary environment we would expect rising rates, more competition for capital, and greater differentiation in the performance between firms – all important ingredients in alpha generation.

We enter 2017 with a sense of modest optimism that the business cycle still has some way to run, but also with a sense that we are entering a new regime. Investors of all approaches can take some cheer that we appear to be entering a period of slightly above trend growth, which for the first time in five years is coordinated across all major economic blocs. There remain many unknowns for 2017 – not least with regard to trade policy – but with economic growth broadening out and turning up, asset markets can probably deliver positive, if modest, returns this year.

John Bilton is global head of multi-asset strategy at JPMorgan Asset Management

Related Posts

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Everything you need to know about being furloughed

Few people had heard of ‘furlough’ before March 2020, but the coronavirus pandemic thrust the idea of bein...

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Coronavirus and your finances: what help can you get in the second lockdown?

News and updates on everything to do with coronavirus and your personal finances.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Not just gender: Britain’s a ‘deeply elitist society’ as class pay gap unearthed

Professionals from working class backgrounds are paid £1,000s less than their affluent colleagues, ground-breaking research has discovered.

Close