We hear from VAM Funds Sales and Marketing Director David Macdonald (pictured above) on the active versus passive debate:
Passive funds have thrived in benign market conditions in recent years. That has often led to the active versus passive debate in fund management concluding in favour of passive strategies. With one political surprise after another over the last 12 months, however, that tide may be about to turn. Worldwide, uncertainty is bringing opportunities for active managers.
An end to the ‘Trump Bump’
In the US, President Trump’s first seven months have been marred by controversy and increasing geopolitical tensions. The administration’s political agenda has met with opposition on several fronts, and the decision to pull out of the Paris climate agreement has left many US businesses dismayed for the future of growth and investment in the economy.
This has meant the ‘Trump Bump’ on Wall Street immediately following the President’s election has evaporated. The US dollar index is now back to pre-November 2016 levels.
Continuing questions over the allegations of Russian interference in the election have been a major contributor to uncertainty. Following former FBI Director James Comey’s Senate appearance, that looks likely to persist.
With this comes market volatility, and increasing dispersion between stocks. Managers now have opportunities to make gains using their expertise to tilt allocations to sectors and regions that offer better prospects.
Britain: an uncertain future?
The UK, likewise, finds itself in unpredictable times. Following the outcome of the recent UK election, doubt around the Brexit negotiations has intensified.
One year on from the EU referendum, the Conservative Government has lost its majority, and firm plans for a “hard” Brexit look increasingly malleable. A softer approach would be welcomed by business, but the uncertainty behind it will not. The Conservatives have also only recently come to an agreement with the Northern Ireland Democratic Unionist Party under a “confidence and supply” arrangement leaving Government’s ability to pass legislation precarious.
As talks with the EU begin, the difficult task of negotiating the UK’s future lies ahead. Only time will tell whether any deal the UK secures proves successful. In the short-term, however, active managers can again take advantage of the rising volatility in UK stocks.
Not all quiet on the Eastern front
In fact, worldwide, there are opportunities for active managers from political uncertainty. In Asia, there have been rising tensions on the Korean peninsula, with US Vice President Mike Pence saying the “era of strategic patience” with North Korea is over. Diplomatic tensions also persist with China.
In the Gulf, too, the past month has seen friction between Qatar and its neighbours. Although small, these countries play an outsized role in the global economy, and the unprecedented embargo Saudi Arabia and its allies have imposed may have far-reaching implications. Qatar and Saudi Arabia are the largest exporters of gas and oil, respectively, while Dubai in the United Arab Emirates, Qatar’s other neighbour, stands as the second wealthiest in the world by some measures. All have a significant role globally.
A shift in economic policy?
Nor is it just upheaval creating opportunities. Many economies have seen an upturn in growth in recent months. In Asia, Japan has strengthened whilst China, although no longer at the peak of its economic growth, remains stable. There have also been positive signs in the western world, too, with improved growth in the US and Europe, which will help drive higher company profits.
In the UK, meanwhile, the pound has finally started to climb. That reflects speculation of an interest rate rise, prompted by indications from the Governor of the Bank of England that increasing rates will be on the cards if continued low consumer spending is outweighed by investment in UK businesses and if unemployment stays low. CPI in the UK stands at a four-year high of 2.9%, strengthening the case for a tightening of monetary policy. This, too, may bring opportunities for active managers
Navigating the waters of uncertainty
Whatever the opportunities, though, navigating these changes across countries can be challenging for advisers. In many cases, discretionary fund managers (DFMs) can play a vital role, bringing expertise to make tactical decisions delivering gains for clients.
However, it’s vital to choose the right international DFM. First, advisors need to find high-quality fund managers with the industry expertise to generate above average fund performance during times of political uncertainty.
It’s also imperative to ensure that the discretionary manager’s strategy adheres to the client’s investment goals, balancing an appropriate level of risk and expected return, as well as having high levels of accountability and transparency. Before outsourcing the management of a client’s hard-earned capital, it’s essential the advisor understands and is comfortable with the investment strategy in place.
Finally, as ever, diversification is key to taking advantage of current macroeconomic trends. This means not only allocating across different asset classes and regions, but also adopting a mix of both passive and active strategies. By making both management styles work in conjunction with each other, fund managers can make the most of any gains and mitigate downside risks.
In truth, there has always been a place in the market for expert fund managers, but the current political climate provides unusually good opportunities for high-quality managers to step back into the limelight. From Trump to tensions in the Gulf and the fallout of the UK election, increasing uncertainty and volatility will be the new buzzwords across global markets. Now is the time to put those rumours of the death of active management to bed.