RRecent reports have shown that active management does not outperform as often over longer time horizons, but there are specific areas where active managers and active funds can shine and shine. Benchmarks are beaten with much higher frequency in small and mid-cap investments, investments in foreign markets and in medium-term bonds, Kiplinger reports.
In more saturated market spaces, such as large caps, the competition is much greater and it is more difficult for funds to differentiate themselves, especially when they are pulling in the same stocks as most other funds in the world. space. Indeed, in large-cap investments, only 17% of active funds beat the benchmark S&P 500 in a 10-year period that ended in June of this year, as data from the S&P indices show. Down Jones.
“Sectors of the market that are less selected have richer targets for active fund managers,” said Ben Johnson, director of global ETF research at Morningstar. “There are fewer opportunities if you come up with the 12 millionth investment thesis for Apple.”
Small cap companies tend to be less invested and the space is less exploited by some of the major asset management companies. It tends to provide a space to identify innovation and seek out high potential investments that are just beginning their upward trajectory, and investing in small and mid caps offers good opportunities for active managers.
“It’s almost like scuba diving,” Johnson said, adding that as investors move down the chain from large caps to small caps, “the murkier it gets, the fewer predators.”
Active managers are constantly on the lookout for what they believe to be “inefficiencies” in which a company is undervalued by the markets, according to Brian Price, chief investment officer for Commonwealth Financial Network. These companies may have strong fundamentals or good growth indicators, and investing in them at valuable prices can offer significant return potential to investors.
Mid-cap companies tend to be among the most overlooked because they “lack the enthusiasm of small companies and the notoriety of the big names,” said Craigh Cepukenas, co-manager of small and mid-cap funds at Artisan. .
Investing internationally also offers a great opportunity for similar reasons: the markets and the companies they contain are often less well known in the United States, and active managers stand a chance to get a head start by having “boots on the ground” in the countries they invest in, according to Dan Genter, CEO and CIO of RNC Genter Capital Management. By visiting companies and working with local agents, active managers are able to better understand the drivers of markets and the local economy and are therefore able to outperform benchmarks more often.
In the Morningstar Active / Passive Barometer report, bargain-priced stock pickers tend to outperform in overseas markets relative to their index peers.
Bonds are another major space in which active managers generally outperform and to which active management lends itself. Since active managers are able to tap into the quality of debt instruments within the bond spaces, they are able to avoid investing in bonds that are lower quality but which might be contained in the index that passive funds follow.
In addition, the ability to orient a portfolio towards higher yielding sectors has been a great success for funds active in the middle bond space in particular. By investing in some of the lower-rated corporate debt securities, or asset-backed securities offering higher returns, active funds can potentially outperform the Bloomberg US Aggregate Bond Index, according to Price of Commonwealth Financial Network. .
Active management firm T. Rowe Price offers eight different actively managed ETFs with a variety of investment strategies within stocks as well as bonds. The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.
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