The markets reacted “surprisingly positively” to events last year after managing to shrug off uncertainty, according to the head of boutique investment management firm Sanlam Four.
Speaking to FTAdviser, the firm’s chief executive Alfio Tagliabue said it was important to reflect on the lessons that can be learnt following the huge political events which unravelled in 2016, namely Brexit and Donald’s Trump victory in the US election.
He said: “Overall, the markets have reacted surprisingly positively to what were expected to be near cataclysmic events on the surface, shrugging off the uncertainty they bring with relative poise after the immediate impact.”
But Mr Tagliabue said: “The degree to which markets have taken this exceptional year largely in their stride has been a surprise to many, including myself.”
According to the Sanlam Four boss, one lesson to take from last year is how dangerous it is for professional investors to largely discount an event when poll margins are tight, regardless of the prevalent market views and odds.
“The core reflection though, is that the unexpected (or irrational in the view of many) has taken centre stage, signalling a stark departure from the dominance of centrist views and outcomes,” he said, adding it has become even more important for investment managers to adapt to the unexpected.
Mr Tagliabue also said investors need to be ready for a lower return environment in 2017.
“This challenges the industry to develop new products and solutions that can ultimately meet client needs and, particularly crucial in this environment, income expectations.”
The debate between active and passive funds will also increasingly be in the spotlight this year, he said, adding there is “little doubt” the marked shift in flows away from active management towards passives will continue.
“It will increasingly involve a shift from ‘closet trackers’ to passives as it is becoming more difficult to justify paying active fees for funds managed to hug the benchmark and often falling short of it.
“This is more so in a low return environment and the Financial Conduct Authority’s spotlight on both fair access to passive choice and the level of fees is a clear testament to it.”
Yet he argued the case for true active management remains compelling, adding: “Passives are by definition price followers and, as a result, a financial world with a predominance of passives is not stable or truly conceivable.
“As the weight of passives grows significantly, we should expect greater volatility and at times disproportionate reactions to price move triggers.”