CONDITIONS will suit active investment management in 2022 says Michael Blayney, head of Pendal’s Multi-Asset investment team.
“If your starting point is that inflation is rising, that tends to reduce the diversification benefits in a portfolio,” says Blayney.
“And 2022 is starting off with equity valuations being very full around the world. In these circumstances you don’t necessarily want to be a passive investor.”
Active investing looks even more attractive when you add the fact that volatility generally provides more opportunities.
“During the period of stimulus and easy monetary policy, it’s been okay to be a passive investor from an asset allocation and a stock perspective,” Blayney says.
“You have had asset classes that have had a steady trajectory upwards.
“When there’s been bouts of volatility, central banks have generally come to the rescue and people have been able to buy the dip.”
But what about the next five years, when interest rates are more likely to be rising, than falling?
“If we have a more volatile environment going forward — because central banks can’t be as accommodating due to higher inflation, and you start to see bonds and equities correlating positively — bonds won’t be as good at providing defensive qualities as in the past.
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“That’s an environment where it will be more important to adopt an active approach to asset allocation.”
Volatility throws up opportunities for active asset allocators and active stock pickers.
“Active stock picking in Aussie equities has always been pretty fertile ground for local money managers.
“In Australian equities, the average manager has consistently been able to add value in the order of magnitude of 1% per annum.
“So Australia has been a pretty good place to be an active investor,” he says.
“Stock picking globally has been more challenging, in part because there’s been a handful of FAANG stocks that have dominated and become a larger part of the index.
“When you have a narrow part of the market running, it’s difficult for active investors to outperform.”
But when a period of excessive valuation in a narrow part of the market unwinds, that can be a great time for active management.
Active investors globally outperformed significantly after the tech bubble burst in the early 2000s, Blayney points out.
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“It was one of the best periods for active investing in global equities.
“Passive has been good strategy to ride the rising markets of the past decade. But rising inflation and a steady reduction in stimulus means we are now at a potential turning point where a more difficult market regime is likely to need a more active approach.
“To be an active investor you need to have conviction and be willing to back yourself,” Blayney says. “But you also need to be able to re-visit your thinking when things change,” Blayney says.
An investment strategy that adapts as the facts change?
That recalls a famous quote often attributed to legendary economist John Maynard Keynes (though some say it was another economist, Paul Samuelson).
When accused by a rival of inconsistent views, Keynes is said to have replied: “when the facts change, I change my mind. What do you do, sir?”
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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