STT State Street Corporation

By Bailey McCann 

As the bull market gets older, some investment firms -- including indexing powerhouse State Street Corp. -- are expressing renewed appreciation for actively managed funds.

Why? After years of gains in both stocks and bonds, investment managers are preparing for bumpier markets, where portfolio returns could become harder to achieve with long-only directional bets.

"Our headline for 2018 is 'go active,' which may surprise some people because State Street is most well-known as an index shop," says Lori Heinel, deputy global chief investment officer at State Street Global Advisors. For Ms. Heinel, the persistence of the stock rally indicates that it may be time to take profits and consider moving some money into funds whose managers can deploy strategies designed to manage volatility and offer downside protection.

Ms. Heinel says changes to U.S. tax law add to her "go active" thesis, in part because there could be some unintended consequences for stocks. "There will be more opportunity for managers to look at the implications of the tax law and how companies are likely to react. That sets up a stronger stock-picking environment," she says.

What is the right amount of exposure to active funds? That depends on an investor's portfolio size, risk tolerance and goals, many managers say.

Know what you own

Critics have long pointed out that actively managed funds often come with high fees and long periods of underperformance. In recent years, investors have turned toward index funds and ETFs, especially in the U.S., where 36% of fund assets are now passively managed, up from 17% a decade ago, according to Morningstar Inc.

But being all in on either passive or active is too binary, says Andy Schuler, senior vice president and investment director at PNC Wealth Management, especially when the market may be about to shift.

"People often relegate active management to the discussion of managers, but it's also how you make decisions at the portfolio level about allocations and exposures in response to changes in the market, so that you stay on track to meet your goals," he says.

Dave Goodsell, executive director of Natixis Investment Managers' Center for Investor Insight, says there is a perception that passive funds are innately less risky, but that isn't always the case.

He notes that individual investors often "struggle with periods of volatility. They may be surprised to see how their passive portfolios react without an understanding of their exposures," he says.

Watch for new risk

Jae Yoon, CIO at New York Life Investment Management, agrees that it may be time to take profits, even if it looks like the stock rally will continue. "If anything, passive strategies themselves are the crowded trade," he says. "If everyone is in passive, then regardless of the valuations of companies, you're in a momentum trade," he says. "That trade will eventually be unwound."

What's more, Mr. Yoon says late-cycle correlations between stocks and bonds can cause traditional portfolio diversification to fail. Active funds typically have more flexibility to respond to that.

New geopolitical risks, including recent U.S. tariff policy, also could add speed bumps to markets. That, too, could create opportunities for active management, says Ric Mayfield, a managing director at SunTrust Advisory Services

Ms. McCann is a writer in New York. She can be reached at reports@wsj.com.

(END) Dow Jones Newswires

April 08, 2018 22:21 ET (02:21 GMT)

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