Active manager Fidelity Investments logo on NYC building. (Photo by Alex Tai) SOPA Images/LightRocket via Getty Images The coronavirus shakeup has produced a stock picker’s market. Therefore, now is the time to pursue superior returns from stock-picking and actively managed funds. Importantly, this new environment could last a long time for two reasons: A preponderance of stock investing is currently in passive index funds. Once the shift begins to the grass-is-greener, actively managed funds, the return differentials will be driven even further apart, compelling others to join the movement. A number of the coronavirus negative effects on industries and on formerly established companies are expected to last a long time. Those effects will cause many stocks to lag while producing opportunities for others to become the new leaders. The changes began last quarter and are now at work in this quarter Shown in the graph below is the performance (including dividend income) of two well-known, actively managed funds compared to S&P 500 and Dow Jones Industrial Average ETFs. Recommended For You Disclosure: Author holds Fidelity Contrafund and Vanguard Explorer Fund Performance for active and index funds from April 1, 2020 John Tobey (StockCharts.com) Think of those performance differences not academically, but in dollars and cents. In only four months, $100,000 grew by: DJIA ETF - $27,040 ($6,190 less than S&P 500 ETF) S&P 500 ETF - $33,230 Fidelity Contrafund - $41,760 ($8,530 more than S&P 500 ETF) Vanguard Explorer Fund - $49,360 ($16,130 more than S&P 500 ETF) Nothing says "compelling" and "exciting" like multi-thousands of dollars in added returns. What about the benefits of passive funds? While two are often cited, there is really only one benefit: Lower fees. However, you get what you pay for because missing from index fund management are skilled analysts and portfolio managers – the necessary ingredients for successful, active stock picking. The other "benefit" is the belief that active managers cannot beat the market. However, that can become a “drawback” because active managers can and do beat the market. Moreover, when active is the favored approach, the outperformance can be large. There are major differences between passive and active management. Active managers are not restricted to a list of stocks in an index, nor are they limited to using the fixed weightings of each (most often by market capitalization in an index fund). Active managers are free to choose and vary their weightings as they see fit, including selling out positions and adding new ones. In other words, "active" means stock picking and replacing as well as allocating and adjusting holding sizes. In addition, there is the advantage of an active manager's "style" or "philosophy" or "approach." (Not to be confused with a passively-constructed special index based on some past data, not forward-looking, fundamental analysis.) Each manager has a particular way of identifying and investing in stocks. The two classic approaches are "growth" and "value," but there are many variations of those, as well as combinations of the two. (Note: My career was devoted to selecting and combining different active management styles for large institutional and mutual funds. This "multi-management" approach works well –both in generating superior returns and in controlling risk. It is how most actively-managed Vanguard funds are constructed, including the Vanguard Explorer Fund.) Now to the big payoffs coming for those investors getting into actively managed funds now… The long-term performance-driven, investor-preference cycle of active to passive and back to active stagnated at "passive" for an exceptionally long period. Since the Great Recession, there have been short-term moves to active, but each was cut short by an extraneous event (for example by President Trump's January 2018 surprise tariffs and by this year's coronavirus selloff). The good news is that passive has become so entrenched (think of it as a mindset bubble), the burgeoning move back to active can produce a dramatic, extended period of superior performance for active managers and stock pickers. Moreover, despite the current warnings that investors are over-optimistic and over-invested in stocks, the Investment Company Institute data show the opposite is the case. Here are this year’s net inflows and outflows for mutual funds and exchange traded funds (ETFs): Equity fund flows for 2020 John Tobey (Investment Company Institute) The bottom line: Now is the time to get active The belief that an index fund is the wisest equity investment is broadly held. However, that mindset is inaccurate. There are times when active management easily beats the stock market, and it appears we are entering such a period, thanks to the coronavirus shakeup. Therefore, with a large majority of investors focused on index fund investing, now is an excellent opportunity for actively managed funds to shine. Moreover, once the passive-to-active cycle gets in gear, the money flows, themselves, will produce even better actively managed results – and excitement.
PieGG was started with a common goal of serving the finance community while they make transitions. All our team members bring to table their unique expertise and experience of stock market which they would like to pass on to future investors.
39843 Cedar Blvd, Newark, CA, 94560, United States
:+1 408 444 7337