John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial
Active management may be poised for a comeback. During the past several years, it’s been difficult for active managers to outperform equity benchmarks. There are a number of reasons for that, including the strength of the market, market distortions from central bank bond purchases, and high correlations between stocks. However, the tide has started to turn, which we believe sets active managers up for better relative performance opportunities in the coming years.
MANAGER CONDITIONS ARE IMPROVING
Several of the market conditions since the financial crisis that have presented headwinds for active managers are starting to abate. One is the ultra-supportive monetary policy environment. As the Federal Reserve (Fed) bought trillions of dollars in bonds (so-called quantitative easing, or QE), interest rates fell to artificially low levels and stock prices climbed despite relatively flat earnings. As the Fed has started tightening its policy, the central bank–driven market has become more fundamentally driven. A more traditional business cycle where fundamentals (earnings, sales, cash flows, etc.) propel stock performance should favor active strategies going forward, a theme explored in our Outlook 2018 and Midyear Outlook 2018 publications. Also note that companies respond differently when the economic environment gets tougher, as it may do over the next couple...