Equity market turmoil and the active investment debate
December 19, 2018
It should come as no surprise that asset owner sentiment is currently dominated by late-cycle tensions. Among pension plans and other institutional investors, this has translated into an appetite for de-risking and diversification, not just beyond equities but within equities (emerging markets, low volatility, small cap, et al.). The climate has also driven a notable increase in interest for explicit downside protection strategies involving overlays.
A recent bfinance survey of 485 global asset owners found 12 per cent (16 per cent in Canada) of respondents intend to move towards active equity management in the coming year, swimming against the passive management current that has prevailed through the past decade. While this may seem like a modest figure, it represents an interesting shift in industry dynamics – especially combined with the softening appetite we’ve been seeing for further movement towards smart beta and passive management.
It’s worth noting that the regions where investors are most likely to expect active outperformance don’t necessarily represent the regions where investors are most likely to shift towards active management.
For example, in Canada 16 per cent of respondents agree with the statement that they expect to move from passive equities towards active in the coming year, with 52 per cent of respondents neutral and 32 per cent disagreeing.
On the other hand, when asked if they expect active equity managers to outperform passive in the coming year, 52 per cent of Canadians said they agree, 41 per cent were neutral and only seven per cent disagreed.
ESG and active appetite
Aside from performance expectations, the study also revealed another somewhat surprising factor incenting some institutional investors to dial up their active manager programs through the coming years: environmental, social and governance factors. Forty-five per cent of investors polled believed “good ESG integration” requires an active, as opposed to a systematic or passive, approach, while only 19 per cent disagreed.
This finding is particularly notable in light of the significant rise in the number of new passive or systematic products that claim to integrate ESG factors beyond negative screening, supported by increasingly sizeable sources of ESG ratings data, and the high-profile efforts made by passive managers to increase their engagement efforts.
Investors, it seems, are far from being entirely convinced by these ESG labels.
When examining past downturns such as the global financial crisis, the dot.com bubble and the euro debt crisis, the data we’ve compiled doesn’t indicate active equity managers, as a collective group, have managed to beat falling markets — some were able to protect plenty of value while some fell even more than the markets did.
So going forward, it will be important to not only identify how active equity strategies are actually coping with recent upheavals in global equity markets, but to also determine which active managers are truly generating active risk adjusted performance and the extent to which that performance has been driven by factors (i.e., value), fundamental stock-picking or the proportion of the portfolio that had been moved into cash.
Les Marton is senior director of client consulting for Canada at bfinance.