Did Active Management Hold up During First-Quarter Volatility?
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.
Source: Russell Investments research.
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 emphasize 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 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 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.
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.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
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Past performance does not guarantee future performance.
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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.
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