Active management might be more suited for the global equity investor rather than passive momentum investing at a time when markets have reached the later stages of a bull market, according to Activus Investment Advisors.
This could be supported by the strong tendency in the current market situation for a large dispersion in returns of individual stocks, which combined with higher equity market valuations, may lead to large falls in equity prices.
At the same time, companies’ announcements, which were in mostly positive, were followed by upswings in equity prices, reflecting the lofty valuations associated with stale bull markets, the firm said.
“In terms of equities, it is a preferred time to hold active investment managers due to the dispersion of returns and a cautious stance on momentum strategies. Most defensive stocks such as lower beta stocks should be increased within portfolios – and stocks such as these in the US are relatively cheap,” Activus’ co-founder, Steve Merlicek, said.
According to Merlicek, the current stage of the cycle was not the best time to be overweight small-, mid- and micro-caps or emerging markets even though they were performing relatively well, and investors were tending to sell liquid large-cap companies.
“As liquidity dries up, sometimes quickly, in the smaller companies space, they often don’t trade or trade only lightly, appearing to show some sort of immunity to broader market price drops,” Merlicek noted.
“Over time, however, smaller company stocks get hit harder than larger stocks and can become ‘zombie’ stocks.”
He warned that investors should take that into consideration and remain cautious also on long-duration interest-rate sensitive stocks such as utilities, infrastructure, real estate investment trusts (REITs) and high-priced growth stocks, as well as on listed and unlisted real estate due to the interest-rate sensitivity in this sector.
At the same time, investors should consider hedge funds – “the right ones” – as they would be a beneficiary of any market dislocation, according to Merlicek.
“Good private equity is still preferred, through one needs to be cognisant of debt levels and multiples being paid,” he said.
“Whilst in the short term a big crash is not being forecast, there are a number of warning signs emerging which leads one to be more cautious and to be prepared for any large downdrafts – which is expected to eventually occur.”