The second half of 2017 might be a good time for active equity management, according to Boston-based Fidelity.
In the Fidelity Advisor Investment Pulse survey for the second quarter of 2017, researchers found that advisors were still most concerned with government and the economy and portfolio management. Simultaneously, few advisors in Fidelity’s survey were thinking about interest rates, which may present missed opportunities.
In the survey, 29 percent of advisors said they were most concerned about government and the economy, while 26 percent said they were most concerned about portfolio management. Another 24 percent were most worried about risk and volatility.
Lower percentages of the advisors pointed to other issues of primary concern, with 12 percent most worried about market levels, 7 percent worried about finding yield and generating income, 6 percent worried about fixed-income markets, and 5 percent concerned about interest rates.
In analysis of its findings, Fidelity warns that advisors may be too focused on downside risks and should be more aware of interest rate policy, as the Federal Reserve continues to forecast gradual rate increases.
Investors might want to consider employing active management in U.S. large-cap equities, according to Fidelity, as active large-cap funds tend to have more mid-cap exposure than benchmark indexes and mid-cap equities typically outperform large-cap equities during periods of rising rates.
Yield and income should also be top-of-mind for advisors, writes Fidelity, as the yield on 10-year Treasury bonds is approaching the yield of U.S. large-cap stock indexes.
When interest rates bottomed out after the global financial crisis, many U.S. advisors and investors turned to blue-chip dividend paying stocks in defensive sectors to supplement investment income. Doing so has increased the valuations of these stocks in excess of their historical average and in many cases well above the market as a whole.
Rising rates could decrease demand for these stocks as investors turn back toward lower-risk bonds for their income needs, resulting in lower valuations and deflated returns for dividend equities.
Fidelity notes that many active managers try to avoid stocks and sectors with higher than typical valuations and may maintain greater exposure to non-defensive sectors, which tend to outperform when interest rates rise.