Time to Get More Active with Active Share
For years now, equity markets have enjoyed a long, steady march higher. Benefitting from low starting valuations, a sea of central bank-provided liquidity, and a steady drumbeat of solid economic growth, stocks have fared well as a group, climbing higher in near unison. Variation in the performance of stock from one company versus another has been subdued, presenting a daunting challenge to active managers that seek to exploit those variations. It has indeed been a golden era for passive (index) strategies, but that era has reached its twilight and is now fading to dark.
We expect stocks in aggregate to continue their climb higher: the global economic expansion, tax cuts, deregulation, and deficit spending all provide supportive underpinnings to the bull market. There is ample reason for equity investors to remain optimistic, but it is important also to recognize that prices will be buffeted by high current valuations, mounting inflation fears, tightening monetary policy, and the growing prospect of a trade war. The impact of these factors will vary significantly from one company to the next, leading to much dispersion in operating results than has been the case for much of the past decade. Just as the variation in earnings is on the rise, so too, will be the variation in performance across stocks. Active managers have taken the baton from index strategies as the importance of security selection comes to the fore.
Average Rolling Sector Correlation (March 1991 – April 2018)
Source: Thomson Reuters Datastream. 4/12/18. Past performance is not indicative of future results. Average rolling one-year sector correlations are a measure of equally-weighted averages of each sector’s correlation to the broader S&P 500 Index.
Active share is a useful metric for estimating the degree to which an active manager’s performance may diverge from that of the benchmark. It measures the percentage of the portfolio holdings that differ from the benchmark index (the portion that overlaps the index is referred to as “dead weight”, as it lessens the extent to which performance will deviate from the index). Higher active share products generally can outperform their benchmark by a wider margin.
A category that tends to show very high active share readings are 130/30 funds. Within this structure, the manager deploys $1.30 in long positions (in securities expected to fare well) and $0.30 in short positions (in securities anticipated to perform poorly) for every $1.00 of available shareholder capital. The ability to engage in short selling, together with the use of gross leverage, allows the fund manager to achieve a level of active share not possible within traditional long-only strategies. Given the widening dispersion of stock returns and the opportunity that presents to active managers, we believe this group of funds will shine brightly over the next few years.
Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.
Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.
Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions. Active management typically charges higher fees. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. There is no assurance that the investment objectives mentioned will be met.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
Passive investing is an investment strategy that aims to maximize returns over the long run by keeping buying and selling to a minimum. The idea is to avoid fees and the drag on performance that frequent trading can potentially cause.
The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance.
SAS Group, Strategic Asset Allocation & Solutions Group, is a division of New York Life Investment Investments. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.