- After so much was made of their potential decline, active managers rebounded in 2017, posting their best performance in four years.
- US stock pickers were aided by low pair-wise correlations, which reflected the degree to which equities performed independently of one another last year.
Heading into 2017, the eulogy for good old-fashioned stock pickers had been all but written.
Robo-advisors and passive strategies were supposed to put them out of commission. And matters weren’t helped much as volatility hovered close to the lowest levels on record, sapping the market of the price swings so crucial for active managers to prove their bonafides.
But then something unexpected happened – the stock pickers fought back. Almost 50% of US active equity funds beat their benchmarks in 2017, the highest percentage since 2013, according to data compiled by Credit Suisse.
- Credit Suisse
The firm also saw a similar recovery when assessing those funds on a longer-term trailing basis. That has Credit Suisse thinking the dip in active performance was temporary, rather than a signal the entire stock-picking industry is failing.
“The rolling three-year relative performance trend was extremely weak heading into 2017,” analyst Craig Siegenthaler wrote in a client note. “But it has started to reverse in 2017 which is hopefully the end of a bad cyclical period for active equity managers.”
Stock pickers got a huge boost from historically low pair-wise correlations between stocks in major indexes – a measure that reflects the degree to which they trade in tandem. For the benchmark S&P 500, the measure sits at its lowest since 1994, while companies in the Russell 2000 gauge of small-cap stocks are trading the most independently since the tech bubble, according to BAML data.
- Bank of America Merrill Lynch
However, just because active managers are experiencing a renaissance of sorts doesn’t mean they’re out of the woods yet. After all, Credit Suisse expects passive investment vehicles like exchange-traded funds to make up half of the stock market by 2020. That likely means stock pickers will have to adapt to survive – something that the data suggests they were able to do last year.