There’s a lot of potential for active managers to add value in today’s market environment. However, that does not mean that all active managers can or will provide value. Anu Ganti, senior director, index investment strategy at S&P Dow Jones Indices, wrote in a blog post that active managers should prefer above-average dispersion because stock selection skill is worth more when dispersion is high.
According to Ganti, when correlations are high, the benefit of diversification falls. And above-average correlations reduce the opportunity cost of a concentrated portfolio.
“When correlations are low, concentrated active managers incur substantially more volatility than diversified index funds,” she added. “A higher cost of concentration implies a larger foregone diversification benefit, translating into a higher hurdle for active managers to overcome.”
Ultimately, Ganti wrote that it was “a relatively auspicious environment for active management” last year as “dispersion and correlations were generally higher in 2022.”
Since 2014, the 12-month average dispersion of the S&P 500 has widened while correlations have been relatively high. Higher dispersion offers greater opportunities for active rotational strategies among countries, sectors, and factors. Last month, S&PDJI saw the highest spread between the best and worst equity factor indexes since February 2021.
While the current market is indeed a good environment for stock pickers, Ganti noted that it’s important to remember that “having the opportunity to add value does not guarantee that value gets added. In today’s environment, active managers have good potential to add value” (emphasis hers).
Ultimately, not all active managers are created equal, and only a handful can provide alpha, regardless of market conditions. Active managers with greater resources and greater scope benefit from economies of scale, which can often translate to better returns.
As part of its lineup of active exchange traded funds, T. Rowe Price offers a suite of actively managed equity ETFs, including the T. Rowe Price Blue Chip Growth ETF (TCHP), the T. Rowe Price Dividend Growth ETF (TDVG), the T. Rowe Price Equity Income ETF (TEQI), the T. Rowe Price Growth Stock ETF (TGRW), and the T. Rowe Price U.S. Equity Research ETF (TSPA).
“When things are going sideways, that’s where active managers can alleviate some of the burden from the investor,” said Neil E. Kays, senior product marketing manager at T. Rowe Price.
T. Rowe Price has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.
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