So it proved at the start of 2018. The sight of a small rise in US Treasury yields led to renewed proclamations of a death knell for the bond market. Add questions over equity market valuations, as well as the recurrent idea that active managers will fight back against passives after years on the back foot, and the prophecies all looked pretty familiar. And we could yet be back here again in 2019.
It isn’t surprising that so many have struggled to accurately call a turn in investment markets; such is the nature of the profession. But there are signs that commentators’ other regular refrain, regarding active managers, may have more validity than it once did.
This may look puzzling at first: the idea of an active resurgence is usually based on the expectation of more difficult markets, which implies a change in valuations. Can one happen without the other?
The answer is yes, should retail and wholesale investor behaviour continue in the manner seen at the end of 2017.
Let it flow
Latest statistics from the Investment Association show another £4.4bn was poured into retail funds in November. Almost half of this went into fixed income funds, indicating a certain investor nervousness. But it was the sharp drop off in tracker fund sales that was the most dramatic evidence of uncertainty.
A net £171m in sales represents the lowest amount since July 2016. That date may look familiar: it was the immediate aftermath of the Brexit referendum, when the retail fund universe as a whole suffered a net outflow.
The difference this time is that active fund sales are thriving. As a proportion of overall sales, November’s tracker fund flows stand at the lowest level for several years.
Whatever the future direction of markets, it seems clear that retail fund buyers – typically more tactical than their institutional counterparts – have begun forcefully backing the narrative that an active approach is better at a time when valuations appear stretched.
There are questions to be asked of any blanket assumption along these lines: plenty of active managers will end up performing worse than their indices in the event of a downturn, and Mifid II will focus yet more attention on the outsize costs attached to many funds.
Regardless, if investor behaviour has turned, it’s worth looking back to those £2bn of bond fund sales in November. The vast majority of these inflows, as usual, went to strategic bond funds. Their flexibility has been lauded during the past decade, and attracted hefty flows from those who recognised conventional portfolios would suffer in the inevitable fixed income sell-off.
That sell-off never came. But like commentators’ predictions, its every delay has only served to strengthen the belief that it really could be around the next corner.
Absolute return funds have performed a similar role for cautious equity investors over the same period – but the new bull versus bear divide could prove to be between active and passive funds, not absolute return and growth portfolios.
Some have described the investment environment of the past half-decade as a “goldilocks” market – not too hot, but not too cold.
Active management, too, could yet have the best of both worlds: steadily rising markets, coupled with a nervousness that means few are prepared to purchase trackers. Fund firms will be licking their lips – as long as the bears can be kept from the door.
