Two large-scale industry influencers—PGIM Investments and Morgan Stanley—are echoing what may be the conventional investment wisdom for the next few years: that selective active management will outperform passive management while curtailing the risks of market uncertainty.
According to a newly released study by PGIM Investments, Seeking the Active Advantage in Uncertain Times, advisors will continue to allocate roughly two-thirds of assets (62%) to active strategies, especially in the areas of international/global and emerging markets on the equities side and high-yield bonds and emerging markets debt on the bond side, where active management can take advantage of market inefficiencies. For the study, the firms surveyed more than 500 financial advisors with at least $25 million in assets under management,
“We are seeing an upward trend of positive net flows into actively managed mutual funds and ETFs post-March 2020, which may indicate that investors are moving more assets toward active,” said PGIM Investments CEO Stuart Parker in an email.
And there’s another upside to active management these days: 81% of advisors said that recent reductions in expense ratio fees in this strategy have made it more attractive.
The biggest concerns for advisors, unsurprisingly, are stock market volatility (68%), economic slowdown (43%) and a low-return environment (41%). Tax management issues and inflation have also grabbed their fair share of headlines, but these are the proverbial cans being kicked down the road, at least for now.
Whether or not one thinks the Covid-19 pandemic is winding down, just getting started or is going to be accepted as a normal part of life, most advisors (76%) acknowledge that the pandemic has influenced portfolio construction as they look for new ways to stay on course. There are other questions as well: whether U.S. growth will continue or waver, whether labor shortages will ease up or deepen and whether economic resilience lasts only as long as the final pandemic payments going out this week.
Accommodating all that variance is a tall order, so the playbook for the fourth quarter of 2021 and beyond likely involves advisors increasing allocations to dividend stocks (79%), high-yield bonds (35%), REITs (31%), investment-grade corporate bonds (29%) and emerging markets debt (24%). In addition, while mutual funds will remain strong, 65% of advisors said they expect to increasingly turn to ETFs and the products that contain them in the search of yield and return.
PGIM Investments’ survey isn’t the only finger in the wind of late. Dan Hunt, managing director at Morgan Stanley Wealth Management, noted in A New Take on the Active vs. Passive Investment Debate that, while active managers much of the time fail to beat their indexes after accounting for expenses, the current investment environment is exactly the kind of climate that lends itself well to active management. When the U.S. stock market is volatile (check) or the economy is weakening (double check), active managers can often outperform in international stocks, emerging markets and smaller U.S. companies.
So in what areas should they rely on the passive approach? Large-cap U.S., where it’s hard to be a winner in this environment, according to Hunt.