AB: How to Gauge Active Management in Today’s Markets

A white paper from major fund group AB asserts that active management is rising to the challenges of the current market moment. “Beating a benchmark is essential—but it’s only one dimension of a stock picker’s role,” the authors write. “In our view, the COVID-19 crisis has reinforced the many functions that active managers fulfill for investors.” The paper focuses on ten ways to evaluate how active managers can help investors get through today’s volatile market conditions. Among the topics discussed:

• Flexibility to choose stocks: AB notes that active managers can identify and select alternate stocks with better prospects while passive portfolios hold onto “severely impaired” stocks as the pandemic inflicts damage across sectors, industries, and companies.
• Anticipating risk: Most risk models used by portfolio managers are backward looking because they rely predominantly on historical data, AB notes, and thus many risk models struggled to cope with the effects of the pandemic. Active investors, on the other hand, consider multiple scenarios and “model cash flows to understand how companies will perform through a prolonged revenue shortfall using big data and other tools.”
• Benchmark, concentration limitations: AB notes the outsize influence of market leading stocks and their impact on benchmarks and warns that, historically, market leaders do not stay at the top forever. “Active managers can provide investors with measured exposure to some of the top names while also ensuring that a portfolio doesn’t get too heavily concentrated in frothy areas of the market that may be prone to a nasty correction.”