Active managers have taken some lumps in recent years, but many market observers believe that active opportunities will shine in 2021.

Data suggest some investors are preparing for that renaissance. Earlier this month, actively managed exchange traded funds topped $200 billion in combined assets under management – a sign investors are still fond of this management style.

“I suspect that most advocates of indexing derive at least some guilty pleasure from observing this ritual. (I know I do.) So, we want to ask, if you know that active management will outperform this year, did you also know that passive would outperform last year? If you knew, why didn’t you say so? And if you didn’t know then, why should we believe that you know now?,” writes Craig Lazzara for S&P Dow Jones Indices. “All of which implies that when we see some evidence that 2021 might be a relatively favorable environment for active managers, we should say so.”

Further stoking inflows to active ETFs are mutual fund issuers entering the ETF space, some of which are converting established actively managed mutual funds to the better-serving ETF structure. There other factors that could bode well for active managers this year.

Dispersion has been running at above-average levels (dramatically so in the case of small caps). If a manager has genuine stock selection skill, high dispersion will reward it (just as it will penalize its counterfeit),” according to Lazzara.

The State of Affairs for Active Management

One of the most elusive combinations in investing is robust upside capture coupled with adequate downside protection.

Investors have had to adapt to this new lower-for-longer rate environment by turning to cash, structured products, and gold as safe-haven plays. On the other hand, investors have also become more aggressive, raised stock allocations, chased momentum technology winners, turned to speculative-grade bonds, and bought speculative bets like crypto in search of higher returns.

However, recent equity market bullishness doesn’t erase the need for downside protection. Active management can be the best avenue for investors seeking that buffer.

“Active returns in 2021 might therefore benefit from the improved relative performance of smaller names and the generally higher level of dispersion, without bearing dramatically higher levels of incremental volatility. If these trends continue, then 2021 might at last be the year when active management reaches its sunlit uplands,” concludes Lazzara.

For more on active strategies, visit our Active ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.