WRONG PLACE, WRONG TIME?
Many active managers have blamed their struggle to generate alpha in recent years on the considerable intervention by central banks, which effectively acts as a dampener on volatility, reducing their opportunity set.
The dominance of top-down drivers in determining market movements has also resulted in high inter- and intra-asset class correlations and a dislocation in markets from fundamentals.
The Lyxor Epsilon Correlation index, which measures the correlation among 65 global financial markets, has been at historical lows since the beginning of the year. As of 31 August, it was at 17%, well below both its peak of 39% in September 2012 and its 27% average since 2004.
“In the recent past passive has done well,” bfinance’s Jones states, “but investors could be looking to switch from active to passive at exactly the wrong time. Looking at the recent past is exactly the wrong thing to do. Falling correlations between stocks and potentially increasing volatility suggest the future could be more conducive for active managers. The proposal to switch to passive may have come at potentially one of the worst times in recent history.”
Not everyone agrees, however. Tapan Data, global head of asset allocation at Aon Hewitt, says: “Periodically we see asset managers argue things will get easier. I am not convinced we are over the hill in terms of correlations because the abnormal policy cycle is still with us, creating a big risk of rises in correlations.”
The debate between active and passive is far from simple and decisions based on recent history could cloud the best path to the future of investors’ investment strategies. For investors looking to increase portfolio efficiency, the devil is in the detail.
The prevalence of closet indexers in the UK also muddies the waters for genuine alpha producers in the UK, making it more difficult for investors to root out managers that present genuine value.
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