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Winter Charts: A Self-Fulfilling Prophecy

“Winter Charts” is a series of current financial topics explained in dots, lines, and only a few words –just the right “mix” to concisely convey ideas for critical thinking about investing.

The word is out: “stock picking is dead,” and passive investing, commonly executed through exchange traded funds (ETFs), is the unconquered future. Admittedly, many stock pickers have not produced the desired results when compared to a pure index play, but, when the public opinion shifts aggressively to one side – as observed by the sheer number of articles, reports, etc. on how active management doesn’t work – the concerned investor, or, better, contrarian, needs to “listen up.”

Our suspicion is that we are dealing with the results of a self-fulfilling prophecy, with the prominence of ETFs contributing to active managers’ inability to outperform. When analyzing sector returns, the difference between the best-performing sector and the worst-performing sector is now at all-time lows. This lack of dispersion creates a challenge for active managers to pick “good” stocks and avoid “bad” stocks. On the other hand, we need to take note of the rise of ETFs now reaching peak/record levels (shown by cumulative fund flows since data became available in 1994). 

The bottom line: Don’t throw in the towel on active management. Sector dispersion will occur, and it is important to be nimble, aware, and ready to find value when it appears (please also see our previous post, Reversal of Fortune).

Matthias Paul Kuhlmey is a partner and head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to high net worth and ultra high net worth individuals, family offices and institutions.

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