Active Equity: “Reports of My Death Are Greatly Exaggerated” – CFA Institute
Is active equity primed for outperformance? Jason Voss examines the evidence for the CFA Institute, highlighting the work of Russ Wermers and others.
A new golden era of active equity is upon us, writes Voss and C. Thomas Howard. In this article, Voss and Howard start by addressing the issues of active vs passive investing and detail the evidence of the return to superior active performance.
"The more stocks are held by passive investors, Russ Wermers demonstrates, the more informationally inefficient markets become and the greater the opportunities for active managers."
Voss and Howard illustrate the predictive ability of the Active Equity Opportunity (AEO). The AEO “estimates the impact of market conditions on stock-picking returns by measuring how investors are driving individual stock return dispersion and skewness.”
AEO estimates are calculated using four components in descending order of importance:
With the backdrop of 4 academic studies Voss and Howard show just how favorable the current environment is for stock picking. “Three academic studies shed light on that question. They find that both increasing cross-sectional stock dispersion, or the cross-sectional standard deviation of returns from either individual stocks or a portfolio of stocks, and increasing volatility, often measured by VIX, are predictive of higher stock-picking returns. Furthermore, a fourth study demonstrates that high positive skewness plays a major role in portfolio and market performance.”
Since late 2019, the market turned favorable for active managers. “Individual stock dispersion and positive skewness, market volatility, and the small firm premium all have increased in recent months,” writes Voss and Howard. “The stage is set for stock pickers to demonstrate their skill.”
Furthermore, “given the scale of recent economic and market disruptions, we can expect heightened uncertainty for some time. This makes determining a stock’s fundamental value a challenge that favors expert, heavily resourced professional equity teams.”
Hedge funds post best start to year since before financial crisis – Financial Times
Lawrence Fletcher stated that the market shake-up has created ‘fertile’ environment for managers to make bets.
“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.
This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.
It's a “good market for active management,” said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.
Goldman Sachs Says Humans Beat Algorithms When It Comes to ESG – Bloomberg
According to this Bloomberg article, Goldman Sachs Group Inc. has found that successful sustainable investment decisions require a human touch that algorithms have so far been unable to match.
Thomas Konig, Goldman’s head of asset management in the Nordic region, says that clearly, active management has a role to play again. “It’s “not just something that is fading out versus ETFs and private markets.”
Goldman’s experience suggests that ESG might bring with it a revival of active management that will also encompass ETFs. The bank has “an intense pipeline” of new products that it plans to unveil this year, particularly in fixed income, and Konig says he “would not be surprised if all of our new ETFs will be ESG or active or have a certain filter embedded.