Revisiting active management and asset allocation

In a unique market cycle recently characterized by greater volatility, two reports reconsider active management and the traditional asset allocation mix.

After fees, active investing typically doesn’t outperform passive, as is well documented by the S&P Indices versus Active reports (a.k.a. SPIVA).

However, in an environment of low interest rates and high valuations for traditional assets, “downside risks are mounting,” noted a report from Geneva, Switzerland-based Unigestion, released Friday. As a result, active managers, with their focus on fundamentals and risk management, may be better placed than passive managers to ensure downside resilience and deliver returns in volatile markets, the report said.

At the same time, active management must up its game if it wants the opportunity to capture alpha and make a difference to investors.

To deliver better outcomes, active managers are embracing new technologies, such as machine learning and artificial intelligence, the report said. And those who allocate capital responsibly to finance growth in a sustainable way are part of an important secular trend toward “more purposeful capitalism,” it said.

Active managers are also finding new ways to replicate the role of traditional assets. The need for new sources of return and diversification is driving the development of alternative risk premia strategies, the report said.

The need to incorporate alternative strategies into portfolios given current market conditions was the topic of a recent AGF blog post. Examining a 60/40 asset allocation, Kevin McCreadie, CEO and chief investment officer at Toronto-based AGF Management Inc., said a simple combination of stocks and bonds won’t necessarily support adequate portfolio growth in an environment of tepid economic growth and persistent low yields.

“Too many investors are ill-equipped to handle the growing risk of a late-cycle economy that, sooner or later, will culminate in a recession and major equity selloff,” he wrote.

Incorporating alternative investments is a potential solution.

“From long/short equity strategies to real assets including infrastructure, real estate and/or commodities such as gold, investors can enhance their 60/40 portfolios through different sources of potential yield and uncorrelated returns,” McCreadie wrote.

For full details, read the reports from Unigestion and AGF.

Also read:

Fitting alternatives into a 60-40 portfolio