14 Sep Active Management – An Antidote to COVID-19…
The eternal dilemma between active and passive investment management resurfaces in the shadow of the health crisis related to COVID-19.
We must bear in mind that the objective of active management is to outperform the benchmark of the managed portfolio. Conversely, the objective of passive or index investing is to faithfully replicate the performance of a specific benchmark.
Then, what type of management should we opt for in these difficult times?
The coronavirus crisis has taken the world by surprise, shocking financial markets and eroding investor confidence. The confinement and social distancing measures issued to halt the epidemic have led to a sharp slowdown in the economy as a whole, with widespread divestment of risky assets, increased risk of bankruptcies in certain sectors, rising unemployment, and increased market volatility. The impending recession will be severe and the consequences of the crisis may leave long lasting effects, which will profoundly alter market behavior and dynamics.
Consequently, investors should be wary of opting for low-cost passive management, not only because of the inherent risks of passive investing, but because they may also miss out on the unique opportunities afforded by adopting an active approach.
For example, the S&P 500 Index, which has delivered an average return of 12% in recent years, has benefited from monetary stimulus measures, such as the continued push for deficit reduction, industry deregulation, international trade expansion, labour force growth, and technological innovation. As a result of the pandemic, with the exception of technological innovations, these factors have lost their ability to stimulate the economy, putting passive investors at a disadvantage.
Financial advisors and low-cost managers, under the spell of passive management during the last bullish rally, must now revert to active management, as it is better suited to outperform in emotional, volatile, and exceptional market circumstances.
Through their robust processes, expertise in specific market areas, and experience in recognizing opportunities, active portfolio managers can deliver significant value added to investors.
One of the reasons that should prompt investors to favour active management is the emergence of new paradigms that will guide the markets in the coming years.
In fact, passive management cannot, by definition, adapt quickly as it simply reflects the prevailing market reality. If the price of oil collapses, as has been the case since the beginning of the pandemic, the weight of this fossil fuel in an index fund will naturally decrease, without analysis, without reflection, without anticipation of a possible recovery, and without taking into account alternative energies that could take advantage of the situation to dethrone it.
Another example is dependence on policy makers. The last decade has been difficult for active allocation because markets have relied less on fundamentals and more on the liquidity injected by central banks. While policymakers are still likely to be an important market driver, especially with the unprecedented monetary and fiscal stimulus that followed the coronavirus crisis, some assets are expected to fare better than others during the recovery, which will pave the way for active allocation decisions.
While passive investments build on old paradigms, active investments can adapt to new ones.
By their very nature, passive investments are based on the past and not the future. Only active management can anticipate and adapt to a new kind of future.
The DNA of Blue Bridge Wealth Management
Selecting active managers is part of Blue Bridge’s culture and strategy. In fact, for nearly 20 years, most of Blue Bridge’s portfolios have been actively managed by managers who are recruited worldwide, who understand market trends, and who have the potential to outperform their benchmark index.
Consider for instance, Canadian manager Guardian Capital. Its Guardian Fundamental Global Equity Fund I, managed by its London, England team, was the subject of discussion during the Blue Bridge-Les Affaires webinar “Investing in a High-Risk World.” This fund, as of September 8, generated a year-to-date return of +5.39%, i.e. more than 4% above its benchmark index. Over a period of 5 years, the annualized performance of this fund is 15.48%, i.e. an average of 5.74% above its benchmark each year.
Don’t be lured by passive investing).