Active Portfolio Management

Posted 06 Jun 2014 by Rick Irwin, CFP, CLU

Growth as an investing style has been more or less out of favour for thirteen years. Recent signals indicate that the pendulum could finally be swinging back in favour of growth.

For years there has been a vigorous debate between the merits of “passive” investing, using low cost investment vehicles that closely follow the overall movement of the markets, and the use of active managers who try to add value through stock selection and asset allocation decisions.

Increasingly, evidence has shown that truly active managers have outperformed passive strategies. A recent study featured in Dynamic Funds’ Advisor magazine1 showed that truly active managers beat their benchmarks by 1.3% annually, net of fees and expenses.

Some encouraging signs for active managers are a renewed interest on the part of investors for growth stocks or small caps, which historically do the best in a rising interest rate environment. Already the more cyclical names, such as technology, are performing well while the more defensive sectors like utilities have lagged; which is counter to more recent trends.

Another important development is the breakdown in inter-stock correlation. For the last several years stocks were correlating as high as 90% of the time, meaning that they rose and fell more or less together. Since June that level has dropped to between 30-40%, meaning that individual stocks are behaving differently, providing a greater opportunity for active managers to add value. This is the type of environment where stock pickers thrive. The key is to select those truly active managers from those who are rising the market wave, as the divergence in performance will likely be greater than it has been in recent years.

1: Zyblock, Myles. “The Comeback of Stock Picking.” Dynamic Advisor. Winter 2014: page 15. Print.