MINNEAPOLIS — Stock prices are likely to be more volatile in 2017 than in recent years, a change that should benefit financial pros.
That was the consensus among money managers and analysts who last month gathered for the Star Tribune’s annual Investors’ Roundtable discussion at the newspaper’s office in Minneapolis.
For several years, individual investors have increasingly steered away from mutual funds and other investments that are run by professional money managers and turned instead to lower-fee index funds that simply track broad segments of the market.
Through the first 11 months of 2016, a record $286 billion was pulled out of actively managed investments and $429 billion poured into passive ones like index funds, Morningstar reported last month. Still, more money is invested in active strategies than passive.
“Its very fair to say that the passive investment theme through ETFs or index funds is certainly the flavor of the day,” said Roger Sit, chief executive of Minneapolis-based Sit Investment Associates and a participant in the roundtable. His firm has 14 actively managed mutual funds and one exchange-traded fund, the Sit Rising Rate ETF, which is designed to help investors hedge against rising interest rates.
“There is a point in time when passive does better than active,” Sit said. “The keys appear to be the predictability of when there will be uncertainty and volatility,” Sit said.
Sit is biased toward active management but believes there is room in portfolios for both active and passive strategies.
In a higher volatility environment he believes active managers do more than just look to beat benchmarks. “An active manager is managing your downside risk,” he said. “It’s not just participating in the upside.”
The appeal of passive investments has been aided by the low volatility environment that was a by-product of extraordinary monetary policies of central banks in the United States, Europe and Japan in recent years to prevent a recession.
But that environment is changing as the Federal Reserve takes the lead in raising interest rates. As well, the arrival of a new U.S. president brings the prospect of greater swings in prices of stocks and other investments as investors adjust to different priorities and policies.
“We’re going to have a little more volatility but more confidence associated with it, and I think that could help active” investments and managers, Jim Paulsen, chief investment strategist for Wells Capital Management, said at the roundtable discussion.
Passive investment strategies began in the mid-1970s with John Bogle’s Vanguard Group, one of the earliest proponents of index-based funds. For years, they appealed chiefly to individual investors. But data shows that employer-sponsored 401(k) plans, public pension plans and endowment funds are all devoting more money to passive strategies than they have in the past.
The trend of more money moving toward passive accounts has had an effect on local firms, including Minneapolis-based Piper Jaffray Inc. In a filing with the Securities and Exchange Commission on Dec. 22, Piper Jaffray said that as part of its annual review of goodwill on its books, it will have to take a noncash impairment charge of $75 million to $95 million due to net outflows of funds from the company’s Asset Management segment.
