2021 Active Management Outlook: Will The Rebound Continue?

Is the active management rebound likely to continue?

In a previous blog post, we emphasized our belief that strong stock picking from multiple differentiated skilled active managers, combined with a disciplined approach to valuation, is an approach well-positioned to continue its recent, strong outcomes. While these types of money managers have benefited greatly from the recent rotation to reopening, the question remains, where can we go from here?

In this post, we take a deeper dive into the gauges we monitor for the active management environment and discuss how this can play out in a well-sourced, risk-managed multi-manager fund. The bottom line is we remain bullish on the opportunity set for skilled stock pickers and their ability to generate excess returns in this environment. 

Mean reversion: It’s still a thing

Throughout the late 2010s, active managers faced three major headwinds:

  1. Unprecedented levels of market concentration
  2. Low levels of cross-sectional stock volatility
  3. Higher levels of stock vs. stock correlation

These factors are the main contributors to what some have labeled the Active Management Recession.  The onset of the pandemic dramatically increased these headwinds to historic levels. Given the extremes, we expect some level of mean reversion. As the world heals, disciplined money managers are increasingly finding a market that rewards a company’s underlying fundamentals.

Market concentration

If you didn’t hold exposures to the largest tech names in 2020, you were likely left behind. A limited number of stocks driving markets creates a difficult environment, even for skilled stock pickers. In this case, it was especially difficult for managers with any kind of valuation discipline. The chart below shows just how concentrated markets became in 2020.

Since the first news of effective COVID vaccines came out, concentration has fallen, albeit still at a historically high level. Additionally, we see increasing scrutiny from just about every major government challenging the dominance and monopolistic power these mega cap tech firms exert over just about every stakeholder. We believe this improvement gives active managers an increasingly favorable opportunity to generate excess returns through stock selection, as the breadth of stocks outperforming their benchmarks increases.

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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...

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