The past five years have been tough on active money managers, but some consultants and data analysts think 2014 could mark the end of that struggle.
With the average variance in returns among stocks — known as dispersion — in the S&P 500 at a 23-year low in 2013, according to research by S&P Dow Jones Indices, there wasn't a lot to separate the performance of good stocks and bad stocks. And therefore, there was not a lot to distinguish stock-picking managers who are worth the extra cash from those who are not.
“What we have found is that the potential for good managers to differentiate themselves from bad managers is deeply germane to the level of dispersion in the markets,” said Tim Edwards, London-based director of index investment strategy at S&P Dow Jones Indices.
Couple that low dispersion with strong performance in global markets, and it seems active managers had a difficult time outperforming in 2013.
As the new year gets underway, some managers and consultants believe a return to rockier markets will produce greater dispersion and more chances for good managers to shine.
“For 2014, while we don't have a crystal ball, it's hard to believe that (markets) will be as smooth sailing as 2013,” said Ian Shea, director, head of equities at consultant bfinance. “Amazingly, 2013 was a year in which the S&P 500 didn't have a correction greater than 5% — that was despite a number of potential hiccups.” The U.S. quantitative easing tapering discussions, a banking crisis in Cyprus and the U.S. federal government shutdown should have had more effect, he said.
“Volatility never really materialized and that may be hard to repeat in 2014. With increased volatility (stock pickers) tend to do better as there is a greater dispersion of returns.”
Investor behavior could also benefit active managers.
“We are now seeing, by and large, better economic news,” said John Walbaum, Glasgow, Scotland- and London-based partner and head of investment consulting at Hymans Robertson LLP. “We could now be in a scenario where investors are not just going to turn risk off at the first sign of bad news; with investors being discerning about the businesses they invest in, that is good for active managers. Against that backdrop, 2014 could well be a better year for active managers. It is always difficult to be successful in picking the winners, but perhaps the environment is more favorable now.”