Investment Insights Podcast: Changing dynamics of the active and passive debate

Chris HartHart_Podcast_338x284Senior Vice President

On this week’s podcast (recorded July 21, 2017), Chris provides some of the more interesting data points and perspectives that help shed light on this potentially changing dynamic.

 

Quick hits:

  • Just as stocks, styles, strategies, sectors, and industries go in and out of favor, so too should performance of active and passive strategies.
  • Passive investing might be peaking and future market conditions suggest a more favorable environment for active management going forward.
  • The incredible growth in the number of ETFs has created a strong headwind for active managers.
  • Correlations between stocks have been stubbornly high while the percentage of active managers outperforming has been below 50% since 2010.
  • The potential for inflation makes it increasingly difficult for markets to rely on the generosity of central banks and continued efficacy of monetary policy.  .
  • At Brinker we believe that both active and passive strategies play an important role in portfolio construction and asset allocation.

For the rest of Chris’s insight, click here to listen to the audio recording.

investment podcast (3)

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Handling ETFs at the Brinker Capital Trading Desk

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

In light of the continued media attention focused on the performance of certain exchange traded funds, during the equity market selloff at the end of August, we thought it prudent to discuss the steps we take here at Brinker Capital to ensure that all of the client orders entrusted to us are handled with the utmost care.

The price action seen across the exchange traded fund (ETF) landscape in late August, and in particular on the 24th, was nothing short of extreme, and is something our trading desk makes every effort to protect our client’s orders from.  We use our trading expertise and depth of experience to ensure that we make every effort to achieve the best executions available for our client’s orders.  ETFs have truly changed the investment landscape through their unique construction and, as a result, require a thorough understanding of their characteristics in order to effectively trade them. We pride ourselves on having gathered a great deal of knowledge, insight and experience in trading these instruments over the past five and a half years, and on having developed strong relationships with a number of well-respected trading desks on Wall Street to further enhance our expertise.

As many of the articles in the financial press discussed, there was a historic level of volatility during the first hour of trading on Monday, August 24, with much of the drastic price swings caused by the exorbitant number of trading halts that occurred across equity markets.  As an ETF is predominantly a simple reflection of the average price of its components, if those underlying constituents are halted, the ETF will not be priced appropriately by the market makers transacting in the security.  This problem can also occur on more mundane openings as well, as an ETF’s components open for trading at slightly differing times.  As a result of this phenomena, unless we have a very specific reason for trading an ETF during the first few minutes of a trading session—an ETF with European exposure would be an example of an exception—we will generally avoid trading during the first fifteen to thirty minutes of the session in order to allow for all of an ETF’s underlying holdings to open and the initial volatility to abate.  Although we did not have any active orders during the morning of August 24, if we had we would not have been transacting until the volatility abated.

shutterstock_70010218The strong relationships I mentioned earlier, with several of the most respected trading desks on Wall Street, allows us to leverage their expertise whenever we are moving into or out of a large position. We carefully examine every instrument we are asked to trade, and make our decisions on an individual basis as to what the best approach would be in order to minimize our impact on that instrument and to attempt to achieve the best possible executions.  Often, when we have a large order in an ETF, which itself is relatively illiquid, we will utilize the expertise of one of our trading partners to transact directly in the basket of securities that comprise the ETF in order to access the truly available liquidity and to minimize our impact on the security we are trading.  This strategy of course would not have helped on the 24th because it was the temporary illiquidity of the underlying securities that rendered the ETFs themselves illiquid, but I feel this example is important as it highlights the efforts we undertake in an effort to seek the best possible prices for our clients. In addition, a number of the articles discussing this episode highlighted the importance of imposing price limits while avoiding the use of “market” orders and this is a guideline we strictly adhere to.  Whenever we have a meaningful trade, we always set an appropriate limit, and will closely monitor the trade until its completion to ensure that the price does not deviate from the parameters which we put in place.

While this article has discussed our approach to ETF trading, we certainly apply the same level of expertise, care and attention to all of the client orders placed in our care, regardless of the investment vehicle.

Brinker Capital, Inc., a Registered Investment Advisor. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Technology Watch: Investing Into The Future

Dan WilliamsDan Williams, CFP, Investment Analyst

I recently had the opportunity to attend a conference that centered on the big ideas in technology happening right now. Hearing from such people as Andrew McAfee (author of the 2012 book Race Against the Machine and his most recent The Second Machine Age), Steven Kotler (author of Abundance: The Future Is Better Than You Think), and Charles Songhurst (former Head of Corporate Strategy at Microsoft), I can make a few blanket statements.

First, these guys are humbled, awestruck, and blown away by the advances being made in technology; specifically in robotics, 3D printers, and in general computing power. Second, the individual and the consumer will be empowered by this technology. Lastly, don’t try to pick the winning company, rather win by picking the area as a whole.

3D PrintingThis last point may seem to some as a “coward’s way out”, but consider the CNN Money article from December 31, 1998, Year of the Internet Stock. In this article Amazon, eBay, AOL, TheGlobe.com, Cyberian Outpost, and a few other names that have since been lost to history, are listed as stocks that had a great year and are part of the revolution. In the 15 years (1/1/1999 to 12/31/2013) following this article, Amazon and eBay clearly have proven to be the winners among the group, returning a cumulative return of 644.81% and 445.81% respectively as the others essentially went to zero. However, if you broaden the technology space, Apple would have been the big winner with an astonishing 5,569.77% cumulative return for this 15-year period. In other words, the idea that the internet was going to be a game changer in the way we communicate and the technologies we use was right, but our clever execution by picking the few likely winners likely would have missed the boat.

Now, let’s fast forward to today as we stare upon a robotic and biotech revolution. While there are a few select names that seem to be the smart bets to land among the big winners—given the magnitude of impact these two areas will have on the way we live and the uncertainty in the specifics of the path this change will actually take—picking an individual winner involves a level of hubris, while diversification within this idea can add value.

Future of TechnologyI left the conference fully convinced that these concepts, both current and future, are going to change the world; however, I remain very cautious regarding the execution and process. Without giving any type of recommendation, there exists at least half a dozen Biotech-focused ETFs. Late last year, the first robotics-focused ETF (ROBO) was launched—and it won’t be the last. All of these are less exciting answers to investing in new technologies versus trying to pick the winner, but as the American poet Ogden Nash once wrote, “Too clever is dumb.”

Investment Insights Podcast – December 24, 2013

Investment Insights PodcastBill Miller, Chief Investment Officer

Last week, the Federal Reserve announced their new policy on tapering.  ISI Group calculates that if the Fed continues on this new track, they would buy $455 billion more of bonds in 2014 before the taper finishes.

  • Good news: New policy, gradual taper, means interest rates weren’t forced to spike
  • Bad news: Not likely of staying on track. Stronger employment data and economic growth early in 2014 would make the Fed taper at faster rate, driving interest rates up.
  • What we are doing about it: Product-specific, but tactics would include researching managers who perform well in a rising interest rate environment or utilizing inverse ETFs

Click the play icon below to launch the audio recording.

The views expressed above are those of Brinker Capital and are not intended as investment advice.

Beginning of a ‘Great Rotation’?

Joe PreisserJoe Preisser, Brinker Capital

As the share prices of companies listed in the United States rose this week, to heights last seen in October of 2007, speculation has run rampant that a so called ‘Great Rotation’ from fixed income to equities may have commenced.

The continued easing of Europe’s sovereign debt crisis, combined with positive corporate earnings surprises and the temporary extension of our nation’s borrowing limit, has helped to quell a measure of the uncertainty that has plagued market participants during the course of the last few years. Tangible evidence of this phenomenon can be found in the marked decline of the Chicago Board Options Exchange Market Volatility Index (VIX), commonly referred to as the “fear gauge”, which is currently trading far below its historical average. The steep drop in expected market volatility suggests that investors believe to a large degree that many of the potential problems facing the global economy are already priced into current valuations, and as such have set expectations of the possibility of any external shocks to be quite low. This state of affairs has led directly to an increased appetite for risk within the market, which has culminated in strong inflows into equity funds. According to the Wall Street Journal, “For the week ended January 16, U.S. investors moved a net $3.8 billion into equity mutual funds. That followed the $7.5 billion inflows in the previous week, along with another $10.8 billion directed to exchange traded funds. Add it up and you’re looking at the biggest two-week inflow into stocks since April 2000” (January 24, 2013).

Although the movement of money into equities this year has been quite strong, whether or not this is the beginning of a significant reallocation from fixed income remains to be seen. Despite the flight of dollars into stocks, yields, which move inversely to price, on both U.S. Treasury and corporate debt have risen only moderately, and bond funds this year have not experienced the type of drawdowns that would be expected if investors were truly rotating from one asset class to another. In fact, what has transpired speaks to the contrary, as although inflows to the space have slowed from last year, they remain robust. According to an article in Barron’s published this week, “Bond funds, meanwhile, attracted $4.63 billion in net new cash. Bond mutual funds collected $4.21 billion of that sum, compared to the previous week’s inflows of $5.45 billion” (January 18, 2013). One possible explanation for the hesitation to exit the fixed income space is the lingering concern among investors over the looming fiscal fight in Washington D.C. and the potential damage to the global economy if common ground is not found. According to a recent Bloomberg News survey, “Global investors say the state of the U.S. government’s finances is the greatest risk to the world economy and almost half are curbing their investments in response to continuing budget battles” (January 22, 2013).

If begun in earnest, a rotation by investors from fixed income to equities would certainly present a powerful catalyst to carry share prices significantly higher; however caution is currently warranted in making such an assertion, as a potentially serious macro-economic risk continues inside the proverbial ‘beltway’. If the budget impasses in the United States is bridged in a responsible way, and the caustic partisanship currently gripping Washington broken, the full potential of the American economy may be realized and this reallocation truly undertaken. David Tepper, who runs the $15 billion dollar Apoloosa Management LP was quoted by Bloomberg News, “This country is on the verge of an explosion of greatness” (January 22, 2013).