Active Management Shines in Turbulent Markets

As outperforming stocks face a potential pullback, active managed funds are set to respond to the shifting market.

Markets have recently hit a stretch of new records, with the S&P and Dow Jones closing at new records on Monday after hitting a five-day streak of winning closes, something the Dow hasn’t done in four years.

A second strong earnings quarter saw growth and value stocks continuing to outperform, but the spread of the Covid Delta variant has investors and the general public alike concerned.

“The Delta variant has hit the confidence of the average American, so we need to watch that for ripple effects on the economy,” said David Donabedian, chief investment officer at CIBC Private Wealth. “This is going to be a chronic issue causing some volatility in markets.”

This was reflected in retail sales dropping drastically in July, falling 1.1%. Estimates had initially placed the decrease at 0.3%. This unexpected drop-off, potentially driven by Delta concerns, has already sent retail stocks tumbling at major retail companies such as Home Depot (HD) (which is down 4.3%) and Lowe’s (LOW) (which is down 5.9%).

The Benefit of Active Management Is a Reactionary One

The shifting winds have many indexers watching their funds fall as multiple industries are taking a downward turn, such as oil and industrial stocks, the latter despite reporting positive production. Enter the actively managed funds, with the ability to respond to increasing volatility, capitalizing on potential downturns in a myriad of ways, depending on a fund’s structure.

Many actively managed funds have downturn and volatility protections built into the way that they function, with market movement triggering a response within the fund. Sometimes this means reallocating in abrupt downturns, sometimes it means converting to a different asset type temporarily.

All of that aside, the very nature of active management is inherently reactive and protectionary because the portfolio managers have the ability to respond in real time to market movements. It’s a mechanic of actively managed funds that makes them increasingly enticing as investors and advisors look ahead to potentially volatile markets while delta remains in play, hampering economic recovery. Funds may lose money in downturns, but they have the capacity to minimize the loss compared to their benchmarks.

T. Rowe Price offers five different actively managed ETFs for investors looking to capture a variety of different exposure types. With volatility ahead, active management funds could offer a shelter from the storm.

For more news, information, and strategy, visit the Active ETF Channel.