This article draws inspiration from “The Dawn of a New Active Equity Era” by C. Thomas Howard and Return of the Active Manager by C. Thomas Howard and Jason Voss, CFA.
In our 2019 book Return of the Active Manager, we emphasized the resilience of active equity management in the face of the growing trend towards passive investing. We proposed innovative strategies to enhance investment evaluation and portfolio management through the lens of behavioral finance.
Little did we anticipate the onset of a new era of opportunity for active equity management.
Before delving into the evidence supporting the resurgence of active performance, it’s essential to address the ongoing debate between active and passive investing, which remains a central theme in equity market discussions.
Active vs. Passive
Despite active equity’s underperformance compared to passive strategies over the past decade, it’s imperative to note that active funds have exhibited alternating periods of success and stagnation. The cyclical nature of this trend, as demonstrated in a recent Hartford Funds study, sheds light on the potential for outperformance in active funds. The graph below illustrates these patterns over the last 30 years, emphasizing instances where active outshined passive during market corrections.
With the recent market turmoil triggered by the global pandemic, active equity management is poised for a potential resurgence akin to previous periods post-economic crises. Leveraging the uncertainty in stock valuations, skilled investment teams can capitalize on divergent market returns and thrive in this challenging environment.
Active Equity Opportunity (AEO)
The current environment presents a favorable landscape for stock picking, driven by increasing stock dispersion and market volatility. Academic studies highlight the predictive power of these factors on stock-picking returns, indicating a potential edge for active equity managers.
Active Equity Opportunity (AEO) assesses the impact of market conditions on stock-picking returns, with a higher AEO suggesting greater potential for active funds to outperform their benchmarks. By analyzing key components like stock dispersion and volatility, managers can optimize their strategies to navigate the evolving market dynamics.
