Report reveals active strategies as key in volatile markets, spotlighting skilled managers' opportunities
February 2024 marks a pivotal point for investors as the financial landscape undergoes significant shifts.
A report by BlackRock Investment Institute, led by experts Vivek Paul, Simona Paravani-Mellinghoff, Devan Nathwani, Daniel Sandersley, Andreea Mitrache, and Shams Orr-Hruska, suggests a growing relevance for active investment strategies in the face of increasing macro and market volatility.
The report, “A bigger role for active strategies,” emphasizes the need for a dynamic portfolio approach.
It argues that the post-pandemic era, characterized by greater volatility and uncertainty, necessitates a shift from static asset allocations to more active strategies, including dynamic indexing approaches.
The era of ultra-low interest rates has passed, and with it, the expectations for future returns have diminished.
This new regime, marked by macro uncertainty and a wide dispersion of returns, presents a unique opportunity for skilled managers to deliver active returns, defined as above-benchmark returns that are not explained by static exposures to macro and equity style factors.
The report highlights that professional managers, as a group, have not necessarily become more skilled, but the current environment is more conducive to skilled managers delivering higher active returns.
This is particularly evident in the developed market (DM) equity and hedge fund sectors, where top-performing managers have been exploiting the new regime's uncertainty and dispersion to their advantage.
However, the report cautions that the ability to consistently pick top managers is critical. The heightened dispersion in market returns implies that investment expertise and deeper market insights are more valuable now than ever before.
Thus, active strategies, including a dynamic approach to indexing, could be more effective for portfolios in the current market scenario.
BlackRock's analysis, underpinned by regression techniques and extensive data, suggests that there are greater rewards for investment insight in this new regime.
The interquartile range of active returns for DM equity and hedge fund managers has widened post-pandemic, indicating a more significant divergence in manager performance.
