Stock pickers have historically thrived following periods of extreme market dislocation, and a choppy economic recovery could extend their period of outperformance, according to a recent analysis by Boston Co. Asset Management.
In a telephone interview, David A. Daglio, a senior vice president and team leader of the firm's opportunistic value strategy, said wide dispersions in valuations among companies in the same sector following those periods of extreme dislocation naturally favor stock pickers.
The study by Mr. Daglio and Michael K. Arends, portfolio strategist for the opportunistic value team, showed a majority of active managers enjoying “extended runs” of outperformance following previous periods of market distress in 1973-‘74, 1990 and 2000-‘02.
In a recent paper, titled “Inflection Point: The Case for Equities and Active Management,” Messrs. Daglio and Arends wrote: “The range of valuation spreads is a key determinant of the ability of active managers to outperform their benchmark. When valuation spreads are wide (indicating an irrational market environment in which pessimism has driven the market significantly lower), active managers have the opportunity to invest where valuation relative to historic norms has become compelling. As a result, they are well-positioned to capture the revaluation process that occurs over time as the market returns to a more normal state.”
A relatively strong recovery, such as the 2003 rebound following the market's previous three-year slump, brings compressed benefits for active managers, while a choppier recovery could play to the strengths of stock pickers over three to four years, Mr. Daglio said in the interview.
In the same interview, Mr. Arends noted that despite the market's rebound in recent months, by some key measures valuations remain attractive. The stocks in the firm's opportunistic value portfolios are trading around two-thirds of their five-year average price-to-book ratios, well above the 50% level seen at the market's lows in March, but that still leaves “plenty of room to go,” he said.