Is good old-fashioned stock picking going the way of the Polaroid camera? That was the gist of a recent debate hosted in Toronto on October 18 by the Alternative Investment Management Association (AIMA) of Canada. The resolution, “Be it resolved: security selection is dead; macro forces drive portfolio returns,” was debated by Tyler Mordy, director of research, HAHN Investment and Andrea Horan, portfolio manager, Aglith Capital Inc.
For Mordy, who was arguing for the resolution, investors are looking for alpha—and dismal stock returns and high correlations between individual securities and markets mean that it’s impossible to find it by stock picking. Volatility and high correlations mean investors need to diversify across risk factors and the best way to do this with a top down approach to markets.
Mordy also dispelled what he called the “Warren Buffet illusion:” the notion that stock picking can make an investor rich. This is virtually impossible today, he said, and the fact that investors are flocking to exchange-traded funds (ETFs) proves is evidence that a macro approach trumps stock selection any day of the week.
Horan, who argued against the resolution, asserted that “no one said stock picking is easy,” adding that a good stock picker beats ETFs because an ETF investor loses the ability to adjust exposure based on changing market conditions. She also pointed to herding around ETFs and other macro-driven strategies, merely creates all kinds of mispricing among individual stocks. And, of course, this creates opportunities for stock pickers. In fact, Horan invited investors to shift to ETFs because, she said, it makes her job easier.
So who won? In the end, the power of stock selection prevailed, the clear majority voting down the resolution. Clearly, security selection is alive and well according to AIMA members. But I would have liked to see this debate in the pension space, where more and more plan sponsors say they are shifting out of stocks and into illiquid assets without the same level of volatility.
Do you think pension investors would have squarely voted down the resolution? Or is stock picking alive and well in the pension space? Feel free to chime in below.