Looking forward, both volatility and cross-sectional dispersion are likely to eclipse the levels experienced in the past few years for large-cap U.S. stocks. This means that, in an environment where returns are harder to come by, investors may want to consider an active manager to source some returns and take idiosyncratic risk.
That said, we’re not advocating that investors abandon the benchmark-replicating approach.With bull market and economic expansion more mature, blending active management exposures—whether through actively-managed exchange traded funds (ETFs), multi-asset managers, traditional active equity managers or other sources—with benchmark-replicating vehicles will become increasingly important for meeting return objectives and controlling risk.
The bottom line: The more muted return prospects for traditional assets from here and rocky road ahead warrant a more thoughtful approach to blending active and passive investing in a portfolio.
Kurt Reiman, a Global Investment Strategist at BlackRock working with Chief Investment Strategist Russ Koesterich, contributed to this post.