Will 2022 be a good year for actively managed strategies, ETFs?

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AAs investors look ahead to an already volatile new year, many market watchers wonder if this could finally be the year for stock pickers and actively managed exchange-traded fund strategies.

Morgan Stanley led the charge, declaring in November that 2022 would be “the year of the stockpicker,” the FinancialTimes reports. According to Michael Wilson, the bank’s strategist, the changing economic and financial cross-currents provide an ideal environment for active equity fund managers to select their best positions.

The first signs are promising. Despite recent swings in financial markets, 51% of US equity fund managers outperformed the stock market in January, according to data from Bank of America.

While this may not be the final result that active managers were hoping for, the average result was dragged down by a horrible month for growth-oriented strategies, which were dragged down by selling massive tech stocks.

In contrast, value investors enjoyed a 69% outperformance rate, and 81% of those focusing on small-cap stocks outperformed benchmarks.

“Alpha is back,” said Bank of America’s Savita Subramanian, referring to the investment term to deliver above-market returns.

Investors are also turning more to active strategies. After nearly ending outflows for two decades, active equity funds attracted $111 billion in inflows globally in 2021, their best year since at least 2000, according to EPFR data.

The past outperformance of passive indexing versus actively managed strategies may also have been attributed to the excellent investment environment for larger companies.

“Asset-liability cycles are not dominated by manager skills,” said Scott Opsal, research director at the Leuthold Group, in a recent report examining the phenomenon. “Instead, they are driven by general market conditions that tend to reward assets or liabilities at any given time.”

When considering active play, skilled stock pickers should outperform in conditions with low correlations and high dispersion, or during times when the differences between good and bad names are as large as possible. In this type of environment, low correlations lead to more opportunities for stock pickers, and high dispersion could improve potential earnings from opportunities. However, this was not the case over the past decade, generally described as high correlation and low dispersion.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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