Monday, January 24

A Faang conical earthquake is what an active manager’s dreams are made of


While their stock obituaries have been retired before, the US tech megacaps have the most to lose if the Federal Reserve follows through on its promise to revoke the stimulus. Its demise would be good news for many investment managers.

High Treasury yields sent the valuable Faang group into a third week of losses. While it is too early to draw definitive conclusions from Jerome Powell’s pledge to phase out, it is a scenario that companies like PanAgora Asset Management see developing with increasing force as pandemic-era programs are phased out. to boost the economy.

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The quant store says a loosening of market extremes will drive discretionary trading forward, thanks to tech megacaps soaking up fewer gains in equity benchmarks as interest rates eventually rise. In his view, the era of limited equity leadership, fueled by explosive growth in passive funds, is beginning to wind down. And a looming less aggressive monetary easing will expand the number of market winners.

“The last episode like this lasted 10 years and generated value-added opportunities for countless active strategies,” wrote a PanAgora team led by CEO Eric Sorensen in a recent research note. “Given the current trend of a drop in concentration, which could last for years due to less aggressive monetary liquidity and rising long rates, the current moves toward passivity may be untimely.”

Stock pickers need not look any further than what happened earlier this year, when a surge in bond yields rocked tech megacaps, helping propel mutual funds to their best start of year in almost a decade.

Stocks fell at the start of the week only to rebound as distress over China’s troubled Evergrande Group and Fed policy eased. Both the S&P 500 and the Dow Jones Industrial Average rose more than 0.5% in five days, breaking a series of at least two weeks of declines. The so-called Faang block (Facebook, Apple, Amazon.com, Microsoft Corp. and Alphabet, Google’s parent) fared worse, losing 0.3%.

As Faang’s shares loosen their grip on the market, the stock pickers are beginning to shine. About 46% of active funds outperformed their benchmarks this year through August, well above the average annual hit rate of 36%, data compiled by Bank of America Corp. shows.

“You are now ready for a better environment for mid-stock. The withdrawal of stimulus from the Fed probably adds to that, ”Keith Lerner, co-chief investment officer at Truist Advisory Services, said by phone. “It makes sense for this to be expanded. If not, to me that means that our underlying thesis may be wrong as to what we are thinking about growth. ”

PanAgora argues that stock concentration cycles have been a key determinant of the relative performance of active money managers. A compounding-weighted indexing approach was compared to non-compounding-weighted alternatives, and showed how they fared through those cycles.

The result: a capitalization-weighted strategy thrives as concentration increases, but offers “significantly” lower returns when macro weather shifts in favor of higher rates.

It’s the latest salvo in the asset-liability debate in which money managers invest billions in exchange-traded funds with the conviction that the decade-long losing streak for stock pickers is far from over.

PanAgora, known for its alternative investment approaches, has a dog in this fight. The company helped popularize risk parity, which is allocated across assets to maintain a target volatility level. It also operates on factor assignments that analyze stocks for characteristics such as their relative cheapness or how volatile they are.

The Systematic Player is far from the first company to end the long-standing travails that plague stock pickers, but the evidence so far is mixed. While a massive exodus that has plagued the world of active investing in the last decade shows signs of waning, with outflows at the slowest year-over-year pace since 2014, passive investing still dominates inflows, data compiled by BofA shows. .

But an appetite for security selection is emerging, at least based on BofA’s client streams. Last week, when the S&P 500 fell, the company’s clients, including wealthy individuals, pensions, and hedge funds, collectively added money to individual stocks as they pulled out of passive vehicles like ETFs.

Removing policy support would mean “it’s more about the fundamentals of individual companies rather than the big stimulus that’s hitting the entire economy,” said Michael Reynolds, Glenmede vice president of investment strategy. “In such an environment, you could expect to rethink the fundamentals of these companies and whether they have a longer-term growth trajectory that makes sense.”

© 2021 Bloomberg


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