Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.
Over the past decade or so, there have been countless studies and articles on the inability of active portfolio management to reliably add value versus market benchmarks, even before accounting for fees. However, most of the research tends to focus on US markets, particularly US large-cap equities, and glosses over (or ignores altogether) the reality that there are other market categories where active managers have, in fact, had a great deal of success historically (and may continue to do so). The inefficient Japanese equity market is a prime example.
The proof is in the pudding, as shown in Figure 1: During 70% of rolling three-year time periods over the past 20 years (ended 31 December 2020), at least 60% of active Japan equity managers — in some years, substantially more than that — have outperformed their respective benchmarks. By contrast, and as expected, most US large-cap equity managers have struggled to consistently top their benchmarks, with 60% or more…
Many investors want to be more long-term oriented — and most should be, at least according to longstanding conventional wisdom. But as we found in a recent survey, there are numerous obstacles to consistently maintaining a long-term focus, with market volatility, manager performance, corporate board pressures, and potential career risk topping the list. After all, short-term bouts of underperformance are all but inevitable when pursuing a long-term investment approach (Figure 1).
With all that in mind, I recently tackled three related questions:
Over the past few years, easy monetary policy worldwide hasn’t been enough to fully revive global economic growth. It has, however, helped to catalyze a strong equity rally, concentrated in a fairly small number of stocks — many of them technology and e-commerce businesses — that have been able to consistently “outgrow” the sluggish global economy. This rally has been aided by the advent of growth-focused ETFs, index funds, and smart beta products, along with (more recently) the US day-trading phenomenon that has accelerated amid COVID-19.
But we think the world is starting to change. Driven by unprecedented levels of monetary and fiscal stimulus in response to COVID-19, the economic growth outlook is improving. Commodity and interest-rate markets are grappling with…
Over the past several years, many investors have moved from active to passive fixed income strategies, believing these markets offer fewer idiosyncratic risks to exploit than equities and are too efficient for active managers to generate alpha. Yet passive approaches have frequently underperformed active strategies across many segments of the fixed income market and may expose investors to several forms of unintended risk.
Active fixed income management not only offers potential for enhanced returns, but can also add value by aligning an investor’s objectives with risks in several key areas where passive, index-tracking approaches may fall short:
1. Performance potential: Active core-plus and investment-grade corporate managers have demonstrated the ability to…
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