Investing styles will take on an active approach


This article is part of a series of special reports entitled “The New Normal” appearing in the March 30, 2020, edition of InvestmentNews.

As the COVID-19 virus upends global markets, advisers have adapted quickly to new realities like teleconferencing with clients and increased market volatility. The next transformation, however, may be a larger one: from buy-and-hold index funds to a more active style of portfolio management.

As broad indexes slump, advisers could look to a more hands-on approach to selecting equities and also fully utilize techniques like rebalancing and tax-loss harvesting to garner additional returns for clients.

Picking winners in a down market, however, is a skill advisers haven’t had to rely on in more than a decade.

“Bull markets make investment pros out of everyone,” said Nick Hofer, president of Boston Family Advisors.

One major advantage to active portfolios is that they can be customized to limit downside potential, he said, something that’s much harder to accomplish with index funds.

“Clients hate losses more than they love gains,” Mr. Hofer said, adding that active management will become the new norm in a bear market. “Complacency snuck up on a lot of advisers, and clients now realize the importance of proactive advisement — whether with investments or otherwise.”

That could prove a boon for actively managed investment products, which have waned in popularity as a flood of cheaper index funds has taken advantage of the longest bull market in history.

Financial service firms, like the wealth management platform Oranj, have already started pumping out more active management products. The Chicago-based platform provider recently expanded its model marketplace with active strategies offered by the asset manager Allianz Global Investors.

Clients may soon ask for actively managed strategies to beat slumping markets, but will advisers be ready?

“Advisers have not seen a significant market pullback since the financial crisis,” said Gene Goldman, chief investment officer at Cetera Financial Group Inc. The uncertainties created by the coronavirus are increasing as the headlines get grimmer, he said, which means there’s potentially more downside to come.

“The market is waiting for clarity on the virus,” Goldman said, adding that a reemergence of active products could take place through the end of the year.

Actively managed mutual funds have performed well in recent downturns. Fifty-two percent of active U.S. equity funds beat their benchmarks during the recent drop-off, for example, compared to about 29% that beat their benchmarks during the rally ending Feb. 19, according to Morningstar data.

From the start of the downturn on Feb. 20 through March 16, a period in which the S&P 500 Index experienced a 29.3% decline, 42% of all active funds tracked by Morningstar outperformed their respective indexes.

A considerable upside in a market plunge is the ability to take advantage of asset allocation, said Charles Failla, a principal at Sovereign Financial Group Inc. Moving funds from the less impacted sectors, like fixed income, into beaten-down sectors like equities is one way to buy at bargain-basement prices.

After the record bull market, asset classes that performed strongly, like equities, may have grown to represent a disproportionate share of the portfolio, Mr. Failla said. Portfolios that were created for a certain risk level may have taken on different risk profiles.

“Rebalancing is always important,” he said. “But during significant sell-offs, it’s key.”

As discount brokerage giants embrace zero commissions, clients will also benefit as advisers find new ways to manage portfolios — without having to worry about racking up additional fees. Those cheaper approaches mean advisers can spend more time rebalancing portfolios or harvesting tax losses.

Dennis Nolte, vice president at Seacoast Investment Services, said that while the panic will eventually pass, advisers’ most important job is to weather the storm and prepare client portfolios for when money gets back in motion.

“Service the hell out of your clients and retain their confidence, as much as possible,” Mr. Nolte said. “Position clients for the inevitable pent-up demand after the bottom is in and folks feel safe to emerge from the darkness.”

More articles from The New Normal:

Advice firms will move more workers home — by Jeff Benjamin

Communicate or get kicked to the curb — by Bruce Kelly

Remote regulation to add new hurdles — by Mark Schoeff Jr.

Expect an influx of new clients — by Emile Hallez

Lower valuations a reality for firms — Ryan W. Neal

Written by Investors Wallets

Recession would slow state autoIRAs, MEPs

LPL adding hours to its back office