Active managers have taken a lot of heat since 2008. After decades of double-digit returns, investors facing today’s low-return marketplace began questioning the inability of some managers to outperform the index after fees.
Even as recently as last summer, Standard & Poor’s put out a report that showed 74% of actively managed U.S. equity funds underperformed the market over the previous three years— and that less than 5% of all top-performing funds actually hold on to the top ranking two years later.
A lot of investors have simply gone passive, abandoning active management altogether in favour of cheap and cheerful products that hug the index. In the ETF space, this has translated to a boom in interest and product development. The industry hit a milestone earlier this month as assets in the global ETF industry reached a new peak of US$2.44 trillion, according to London-based ETFGI.
But is the tide finally turning? Could stock picking be making its big comeback?
Yes, according to new data from analysts at Credit Suisse Trading Strategy, which finds investors favouring trading in individual stocks over ETF use. ETF volumes have dipped down slightly to 16.5% of total equity volumes this year down from 16.7% in 2013.
Why the shift? It’s all about the macroeconomic suggests Credit Suisse. According to its analysts: “ETF usage typically increases when macro issues dominate and correlation increases since ETFs are a convenient way to move money quickly and shift beta exposures efficiently”. So, as the eurozoe and the U.S. suffered through a large scale economic shakeup and the same stimulus approach on the part of policymakers, their markets moved in lockstep.
But those kinds of correlations are on the wane according to Credit Suisse and that has created fertile ground for stock picking.
It’s an interesting theory for sure. The question is, can active managers exploit improving stock picking conditions in a way that generates meaningful returns over fees?
And will this really dial back ETF growth when all is said and done?
I’m thinking it won’t – especially when other big macroeconomic issues are coming to the fore (think China, the Ukraine and the Middle East).
What do you think? Is stock picking back and, if so, will it trump ETFs in the long-run?