Is it too early to call active strategies' comeback?

Poll of CFA charterholders reveal split opinion and regional differences amid unclear data

Is it too early to call active strategies' comeback?

While advocates of active management may believe that the coronavirus crisis has set the stage for its comeback, not everyone’s so sure.

Recently, the CFA Institute conducted a survey of its members concerning the effects of the coronavirus-induced economic crisis on capital markets and the investment management industry. The survey, to which 13,278 CFA charterholders sent valid responses, covered a range of subjects – including active investing.

“Common wisdom explains that it is in times of crisis that active managers should prove their worth by protecting their clients’ capital better than indexed strategies would, since they can make active bets at sector or asset level,” the CFA Institute said in its survey report.

But that may not be how things play out during this crisis. The problem, according to one critical argument, is that the normal process of value creation and assessment in financial markets may have been short-circuited by the massive amounts of central-bank intervention and quantitative easing unleashed in recent months. As the most dire economic effects of the crisis appear to have been softened by public authorities’ interventions, active managers in general may find it hard in the short term to make up for past underperformance.

The data currently available on active funds isn’t going to answer any burning questions. The most recent findings of the SPIVA scorecard report of equity funds, for example, reflect performance as of December 31, before the novel coronavirus truly made itself felt and wreaked havoc on financial markets.

For what it’s worth, the latest SPIVA findings show that the years-long trend of active funds mostly failing to beat their benchmarks hasn’t been broken. Canadian funds had the poorest showing, with 88% failing to match or beat the five-year performance of the S&P/TSX index; South Africa-listed funds did the best on a relative basis, with only 61% underperforming the S&P South Africa DSW Capped Index over the same period.

As for CFA Institute members’ opinions, 42% thought it was unlikely that active funds could use the current crisis as a springboard to bounce back; 31% said active managers can prove themselves; and 27% took a neutral stance.

From a regional perspective, respondents in Europe and North America, the most advanced capital markets, were the least optimistic about active management’s potential to rebound with the crisis; the report attributed that to the fact that those markets are already most efficient and have experienced the strongest monetary policy responses. Meanwhile, those in emerging markets such as South Asia, the Middle East, and Africa were the most confident in active management’s ability to rebound.

“Further analysis will be required in a few months’ time to determine if active funds were able  to  identify  pockets  of  value  or  untapped  growth  that  market  indices  by  definition  would not,” the report said.


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