The re-emerging need for proactive asset manager acumen and skill – stock, sector, and thematic selection – is one of the silver linings of this week’s global stock market route.
Many old fashioned stock pickers (bottom up) and thematic (top down) managers across the industry have struggled at least in the major equity classifications to outperform and deliver clients chunky clumps of alpha in what have been broadly rising markets.
Buoyed by the artificial and partial removal of risk in equities due to ScoobyDoo-like central bank meddling and peskiness; the old adage of all boats float in a rising tide resonated and the opportunity for significant arbitrage and information asymmetry (i.e., outperformance) has been limited since the financial crisis.
Why pay for expertise if cheap access to beta through an index or an ETF can do the job for you?
Active managers have been ‘Nigel no-mates’, sitting at the back of the party sipping fizzy pop from polystyrene cups while the cool kids; the ETFs, index providers and more recently Smart Beta funds were cutting moves on the dance floor.
Rather than running man however, markets have been running hot for several years with volatility relatively benign.
Meanwhile, active managers have had to endure the near-decade rise of passive investments stealing the limelight while having their own ability, reputation, judgement and wisdom questioned.
Yet once markets begin to tumble passive provides next to no safety net on the way down – a jolly good ride on the way up for investors who like theme parks and white-knuckle rides.
Seemingly, the cycle shifted this week, well as far as cycles can – given they tend to be phased in over time.
Nonetheless, now there’s an opportunity for portfolio managers globally – be it New York, London, Tokyo, Singapore, Boston, Milan, Sydney or Frankfurt – to remind clients just how important it is to have someone with two firm hands on the aircraft’s yoke and flying the plane once it turns choppy.
On Monday the VIX set off like a rocket in the general direction of space and possibly signalling the end of the prolonged bull market.
Beijing fell into the trap that has beset the US, Europe and the UK recently, after being forced again to intervene. Something it normally has no issues with in most areas of Chinese life.
But even a fresh 25bps interest rate cut and plans to pump money into the market to provide liquidity are insufficient once fear takes over. The slide continued. Sounds familiar, eh?
Markets are now used to central bank stimulus and as each respective jurisdiction tries to turn off the drip-feed we’re going to see more uncertainty and wilder swings of volatility – especially if the two growth stories, the UK and US – see their altitude reduce because of stormy weather elsewhere.
One percent of US GDP is supposedly derived from China, however 100% of investor sentiment is drawn from events both local and globally. It’s impossible in this age of intertwined markets to remain unaffected by events 1,000s of miles from you.
This means the road ahead will remain bumpy and you’re going to want somebody guiding you other than a sat nav.