Bloomberg | Nov 08, 2019 22:53
(Bloomberg) -- Stock pickers love to pin their woes on the rise of algorithmic strategies and exchange-traded funds. But a team of quants argues they’ve just been caught flat-footed by slumping interest rates -- and there’s a fix.
Holding low-dividend stocks during an era of rock-bottom borrowing costs and reducing portfolio turnover help explain why active-manager performance has “collapsed” since 2018, according to Nomura Instinet LLC analysts led by Joseph Mezrich.
Depressed rates lift high-dividend shares at the expense of the low-dividend peers favored by equity pickers, the team argues in new research this week. Throw in a trend toward reducing portfolio churn to save on transaction costs and it’s a poisonous cocktail for active management.
“Much of the poor active manager performance of recent years can be traced to how funds have been positioned for interest rate movements and how funds have reduced portfolio turnover, presumably to reduce costs,” the team writes. “Importantly, there may be remedies.”
With rates set to stay lower for longer and pressure on fees growing across the industry, managers should look to high dividend yielders, according to Nomura. They should also boost portfolio turnover to avoid “momentum traps,” or hanging on to winners long after they’ve stopped winning. Momentum factor “optimization” or “hedging” can also help, the team said.
Last quarter was another to forget for large-cap managers, with just 21% outperforming their benchmarks after fees, according to Nomura Instinet. That echoes recent findings from Bank of America (NYSE:BAC).
Thanks to their status as bond proxies, high dividend payers have outperformed amid the central bank-induced global slump in borrowing costs. That’s been bad news for active managers, whose biggest overweights tend to be low-dividend-yielders, according to Nomura.
Meanwhile, rising borrowing costs tend to coincide with stronger performance for smaller firms, which have greater sensitivity to the state of the economy. When small-caps do well, “market diversity” increases, providing managers “a larger pool of alpha opportunities,” the quants write.
That pool has been awfully shallow in recent years as the opposite has been true -- the performance of small companies has lagged as growth slowed and rates were lowered to support the economy.
Written By: Bloomberg
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
More markets insights, more alerts, more ways to customize assets watchlists only on the App
More content, faster quotes and charts, and a smoother experience is available only on the App.