If you're only looking at track records of three years or less, you're missing half the picture and making decisions based on pressure, not insight. Many investors bought high-flying tech portfolios at the end of the 1990s hoping to make quick returns rather than wait for slower, steadier value funds to bear fruit. And ultimately it was the value funds that significantly outperformed at the beginning of the new millennium.
That same impatience also drove investors from active to passive strategies over the past few years, as stocks moved in lockstep with one another and fundamentals were discounted. We may be reaching a similar inflection point today, but this time, it will be active managers—especially those who are able to generate outperformance, or alpha, that will carry the day.
Alpha Matters More
In my career, I have never seen an environment like the one we're in today. Interest rates are at historically low levels all over the world. There is more than $13 trillion dollars in global debt carrying a negative interest rate. This has created a perverse situation where investors actually have to pay borrowers for the right to loan them money. And when you couple that with extremely high levels of government debt and low global growth rates, it's easy to see why investment returns will likely be much lower in the years ahead.
Historically, investors could reasonably expect annualized returns of about 10 percent in equities and 5 percent in intermediate bonds. In the coming years, many expect those returns to be cut in half. This will put a huge premium on the value of alpha, as most investors simply won't be able to reach their savings targets through benchmark returns.
Even the best investors will underperform at times—sometimes for a few years in a row. The secret to their success, however, is their ability to take advantage of the opportunities that come from taking a long-term view in a short-term world. Time arbitrage as I call it, simply comes down to having the conviction and discipline to allow enough time for good investment ideas to play out. For investors, instant gratification is ultimately a loser's game. But time is an asset.
Michael Roberge is co-CEO and chief investment officer of MFS Investment Management.