For stock pickers, it’s the dream that will never die: An aging bull market prone to violent dislocations will revive their fortunes as they buy over-looked winners and snub losers.
Famously, it hasn’t gone to plan over the years as the passive revolution marches on. But the underbelly of equity markets is flashing more bullish signals for the besieged industry.
More shares are marching to their own beat and relative valuations are looking stretched -- giving investors across Europe and the U.S. fresh opportunities to beat the index. Even the red-hot ETF market is seeing rare outflows of late, as more money managers flock to single stocks.
And as late-cycle volatility flares up, bidding up benchmarks looks perilous versus more-dynamic strategies that hedge risk-on, risk-off markets, the theory goes.
It all helps to explain why in a watershed year when U.S. passive funds are projected to manage half of all assets, the likes of Fidelity International, Goldman Sachs Asset Management and Berenberg are in fighting spirits.
“The market environment is really changing,” said Mark Phelps, chief investment officer of global concentrated equities at AllianceBernstein in London. “Quantitative easing meant buying beta and the best way to access it was via ETFs, no question. But now we’re looking at alpha, and now is the time to find active funds.”
There’s evidence investors are migrating out of passive vehicles to wager on single equities as macro risk reduces the allure of undifferentiated allocations via the benchmark. U.S. and European ETFs were stung by $16 billion of redemptions in January even as developed markets added trillions in value, according to data compiled by Bloomberg.
On the flipside: Investors on Bank of America Corp.’s platform this year have bought about $4.8 billion in shares of individual companies, excluding buybacks, while selling some $5.3 billion of ETFs across the board.
“Clients continued to buy single stocks and sell ETFs, which has been the case for the last four consecutive weeks,” the firm’s strategists Jill Carey Hall and Savita Subramanian wrote in a Feb. 5 note.
Sure, rebalancing for tax reasons may have something to do with it, and as the maxim goes, flows follow performance -- explaining some of the withdrawals from large-cap ETFs last month after the December meltdown. Deutsche Bank AG, for one, expects this trend to reverse thanks to encouraging U.S. data. And the rotation is just a drop in the ocean compared to the decade-long preference for ETFs over single stocks.