Asset TV Active Management Masterclass: Why Active Now?
article 04-12-2017

Asset TV Active Management Masterclass: Why Active Now?

Senior Investment Strategist Steve Lipper joins Asset TV's Active Management Masterclass to discuss the potential benefits and opportunities for active management.


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Senior Investment Strategist Steve Lipper joined Asset TV's Active Management Masterclass on March 28 to discuss what's next for active management, and the conditions that could allow active managers to outperform.

"Let's look at …2011 to 2015. So the Fed... [created] a period of extraordinary monetary accommodation. That money flowed to the financial economy. When that happens, you have the stocks more moved together. So that created an environment which is more challenging for active managers. Now, the good news for active managers is that we firmly believe that regime is over. And 2016, at least in small-cap, was the beginning of what we think is a multi-year run [for active managers]."

"We would make the case that we have shifted from an era of a primacy of asset allocation to a primacy of security selection. Well, if you agree with that, the index has no security selection. And our other view is that as it becomes more challenging and some companies do better and some companies do worse, that picking the winning companies or better business models, better management, better balance sheets will generate more value. That's what we are seeking to anticipate every day. And that's the advantage that somebody gets with an active manager."

Steve discussed passive investing, telling host Gillian Kemmerer, "They’re actually trend-following strategies. By weighting something by market cap, you're actually loading up with today's most popular stocks. Well, popularity has higher expectations. So how does that manifest itself? Well, when you come to a downturn, when people are getting a little bit more pessimistic about whether it's economic growth or just the risk tolerance in general, high expectation stocks are more vulnerable. And so that's why passive, loaded with those more heavily than an active portfolio, tends to be more vulnerable."

Elaborating on the possible benefits of a forward-thinking process, Steve said, "Active is about anticipating, and anticipating change or appreciating something that's underappreciated. So let's contrast that with passive. The benchmark basically says implicitly that things are going to continue at the same pace in the same way forever. There's not going to be any cycles in market cycles or in product cycles or in supply demand cycles. So let's contrast it. Well, there's two different ways that we go against that. In some, we will seek to anticipate a turn in a market where there will be, in a particular industry, supply/demand shift that, maybe for example a trucking area, or that maybe in the demand for sensors – electronic sensors in another area. But it can also be that we think the markets under-appreciate the resilience and persistence of a particular moat of a business model. We could analyze and say the market thinks that this company is going to degrade over time that it's going to become average. But this is really a special company; they have through R&D a market presence, a network effect, a really differentiated business model, that's going to carry them for a long period in the future. And the current stock price doesn't reflect that."

Closing the segment, Steve discussed why advisors should consider active management in the small-cap space: "The advisor retains control actually when you have active. So you can choose what is the risk level that I want to have in our strategy, at Royce we have small-caps at different risk parameters. And the second thing is they can choose whether or not they want to have their outlook. So we have some strategies that are more sensitive to economic acceleration than others. So I think when an advisor chooses active they actually do retain more control."

Watch Asset TV's Active Management Masterclass here.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of March 28, 2017 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

Although dollar cost averaging can be a beneficial method for long-term investing, it does not guarantee a profit or protect from loss in a declining market. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.

Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (Please see "Primary Risks for Fund Investors" in the prospectus.) 

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell© is a trademark of Russell Investment Group. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 as determined by Russell Investments. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)



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