10 Active Angles on Today’s Market Challenges

After a historic market crash and a lightning rebound, active manager performance is under the microscope. But beyond returns, investors should consider many angles when evaluating active managers through an unparalleled global crisis and an indefinite period of economic uncertainty.

How did your active equity portfolio manage risk through the downturn? Did the portfolio maintain a strategic focus while adapting to the unfolding crisis? What’s the best way to position for the pandemic’s long-term effects on the global economy?

The answers to these questions require a broad understanding of what active equity portfolio managers are paid to do. Beating a benchmark is essential—but it’s only one dimension of a stock picker’s role. In our view, the COVID-19 crisis has reinforced the many functions that active managers fulfill for investors. While passive investing has its appeal as a low-cost way to access market beta, we think active strategies offer compelling advantages, especially in today’s unstable and uncertain environment. Here are 10 angles for evaluating how active managers can help investors get through today’s volatile market conditions and achieve long-term investment success.

1. Finding Winners in Crisis Markets

With the pandemic inflicting massive damage across sectors, industries and companies, passive portfolios will hold shares of many companies that are severely impaired. Active managers can identify select companies that have a much better chance of withstanding the pressure and performing well over the long term.

This has become harder today because COVID-19 has prompted extremely wide dispersions in various company indicators. Valuations, growth and profitability metrics are showing vast differences between top and bottom ranks. Earnings forecasts for MSCI World Index companies are now more widely dispersed than any time in the last 20 years (Display, left). Yet this dispersion creates fertile ground for active managers to sift for the most promising candidates, based on research into business models, balance sheets, industry trends and management capabilities. In the past, when earnings dispersion was wide, the average active global stock fund outperformed the MSCI World (Display, right).

Average dispersion of quarterly EPS forecasts for the MSCI World and relative returns for active equity managers from 2000-2020.

2. Long-Term Performance Trends Are Better than Perceived

Active managers get a lot of negative press. But is it really deserved? Over shorter periods, active managers haven’t fared particularly well. But over 10-year periods, most active managers in several categories have beaten their benchmarks (Display). That’s important for investors with long-time horizons and can help provide context to cope with short-term stress and volatility.

Percentage of actively managed strategies outperforming their benchmarks over the last 10 years, for different equity categories.