Is Active Management Poised For A Comeback In 2017?

Following several challenging years, some market participants are expecting that 2017 may be a better year for active management, given the potential for a continued rise in interest rates and more volatility in equity and bond markets. Active managers generally have more opportunity to outperform when volatility is high (potentially creating opportunities to buy low and sell high), and when asset classes and individual securities see more dispersion in returns (versus the “rising tide lifts all boats” market experienced in recent years).

The financial industry often lumps all active funds into one bucket, but in reality there are a continuum of products, as shown in the figure below. On the left are managers who have portfolios that are not very differentiated from the benchmark they follow. These types of managers, which we refer to as closet indexers, may have a hard time generating enough return in excess of their benchmarks (alpha) to cover their fees. On the right are managers whose portfolios are more differentiated from their benchmarks, which may offer a higher potential to outperform even after the impact of management fees.

So how do investors tell the difference?  A metric called active share can help. The concept of active share was developed in 2009, as a systematic way of determining how much a fund deviates from its benchmark. A study conducted by Cremers and Petajisto found that historically, “funds with the highest active share significantly outperformed their benchmarks, both before and after expenses, and they exhibited strong performance persistence.”[1]

Like any piece of data, active share just tells one piece of the story and shouldn’t be relied upon as the only factor when purchasing an active fund. This measure can be misleading if a manager typically holds stocks from outside of the benchmark (i.e., international stocks in a domestic portfolio) or in more diversified asset classes such as small cap stocks, given a larger number of small positions in the benchmark. However, your financial advisor can help you incorporate active share as part of a broader due diligence process to help avoid paying fees for closet indexers, and ensure that the active manager you are using is truly active.

[1] Cremers, M., and A. Petajisto. “How Active is Your Fund Manager? A New Measure That Predicts Performance.” International Center for Finance at the Yale School of Management, March 2009.

IMPORTANT DISCLOSURES

 Past performance is no guarantee of future results.

 The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.

 Investing in mutual funds involves risk, including possible loss of principal. Mutual funds have specific risks such as manager, concentration, and liquidity risk.

 Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

 Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers incorrectly anticipate changing conditions.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor
Member FINRA/SIPC

 Tracking #1-593611 (Exp. 3/18)

Market Update: Friday, March 24, 2017

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  • U.S. equities try to trim weekly losses. (9:55am ET) Domestic markets are moving higher in early trading following yesterday’s session in which the S&P 500 was unable to hold on to midday gains, closing lower by 0.1%. Healthcare (-0.4%) and energy (-0.4%) were the largest movers to the downside, while lightly weighted real estate (+0.8%) advanced. Overseas, Asian markets rose despite Thursday’s lackluster session in the U.S.; the Nikkei (+0.9%), Shanghai Composite (+0.6%), and Hang Seng (+0.1%) all posted gains. Meanwhile, European stocks are lower midday (STOXX 600 -0.3%) despite data showing Eurozone business activity grew in February at its fastest pace since 2011, according to flash Purchasing Managers’ Index (PMI) data. Elsewhere, WTI crude oil ($47.98/barrel) is up modestly but likely to end the week lower, COMEX gold ($1245/oz.) continues to pare early-week gains, and the yield on 10-year Treasuries is little changed at 2.42%.

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  • New home sales climb. New home sales data for February released yesterday took some of the sting out of the disappointing existing home sales and flat home prices reported earlier this week. New home sales grew 6.1%, topping consensus expectations, with January revised modestly higher. Rising mortgage rates are putting some pressure on home sales, but an improving labor market and potential economic acceleration have kept the market on a steady growth path, with the prospect of rising household formation adding a possible demographic tailwind.
  • Mixed durable goods report. Orders for durable goods in February increased by a better-than-expected 1.7%, following January’s solid and upwardly revised 2.3% advance. “Core” durable goods (excludes transportation and defense) dipped 0.1%, disappointing relative to the 0.5% increase expected by Bloomberg consensus. However, the data series is lumpy, and a three-month annualized growth rate shows a strong 9% increase, suggesting that capital investment, which may still get a policy boost from Washington, D.C., is showing some increased strength. Also note that core durable goods shipments for February, which go into the GDP calculation, were a net positive (+1%) and support Q1 GDP growth in line with expectations in the 1-2% range.
  • European PMI data came in better than expected. Data improved across the board, with increases above expectations for manufacturing and services PMI in both Germany and France. The broad manufacturing PMI was 56.2 and services PMI 56.5, the highest readings in nearly six years. This data tends to lead other economic data, suggesting that the market may be right to look past the weaker economic data in Europe for Q4 2016. Strong leading data supports both increased GDP forecasts, as well as expectations for significant earnings growth for 2017.
  • GDP revision and consumer spending highlight upcoming economic calendar. In the week ahead, we will receive revised gross domestic product (GDP) data, consumer spending for February 2017, and additional housing data (pending home sales, Case-Shiller home prices). Revised GDP for Q4 2016, due Thursday, March 30, is expected to be revised up slightly from 1.9% to 2.1% according to a consensus of economists from Bloomberg. Markets are interested in how this report translates into early 2017; Federal Reserve (Fed) models see slower growth in the 1-2% range for the first quarter of 2017. Market participants will look to the latest consumer spending data for clues as to whether recent steady consumer spending will continue. In addition, several speakers will keep the Fed in focus, and we receive personal income (wage) data for February. Looking overseas, China reports its manufacturing PMI on Thursday

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Click Here for our detailed Weekly Economic Calendar

Friday

  • Durable Goods Orders and Shipments (Feb)
  • Markit Mfg. PMI (Mar)
  • Eurozone: Markit PMI (Mar)

Saturday

  • China: PBOC’s Zhou Speech

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking #1-593652

Is This The Start Of A Bigger Correction?

Is This The Start Of A Bigger Correction?

After the first 1% drop in 109 trading days on Tuesday, many are wondering if this is finally the start to a market correction. Crude continues to weaken, small and midcaps are weak, and previous leaders like financials are pulling back as well. The S&P 500 Index might be less than 2% away from the recent peak, but many other sectors are showing weakness under the surface.

For starters, one of the main reasons the S&P 500 could be due for a 5% correction is it has simply been so long since we’ve seen one. In fact, the last 5% correction was right after Brexit—some nine months ago.

Looking at the data, the S&P 500 hasn’t been more than 5% away from its all-time high for 185 trading days, one of the longest streaks ever. Per Ryan Detrick, Senior Market Strategist, “The S&P 500 has gone a long time being within 5% of its all-time high, but here’s the catch—these streaks can continue for much longer than most expect.”

Some other things to remember:

  • Going back 20 years, March and April have been two of the strongest months (April ranks number one and March number three), decreasing the odds that a major correction could start now.
  • Over the past 11 years, the return during March and April has been positive 10 times, with the only loss being less than 1%, in 2015.
  • When the S&P 500 has made a new high at some point during the month of March (like it did this year), the entire month of March has closed lower only once going back 60 years (higher 15 out of 16 times with the only loss coming in 2015). March is down 0.6% currently this year, so this will be close with about a week to go.
  • Since 1928*, when new highs have been made in March, the month of April has been higher 75% of the time (15 out of 20), with the worst monthly return down only 3.1% in 2000.

Be sure to read Getting Technical With “Green-Tinted” Signals for more on why we think any pullback could be relatively modest and would be a buying opportunity.

IMPORTANT DISCLOSURES

*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Stock investing involves risk including loss of principal.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking #1- 588711 (Exp. 3/18)