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‘Quality will out’ proves accurate among active fund managers in coronavirus crisis

There was a wide variation between the best and worst-performing active managers in the first quarter of the year, according to an analysis by bfinance, with managers focused on Quality performing best in developed markets.

While the top quartile of active managers outperformed in all regions relative to their benchmark indices, the disparity most apparent in global developed markets, with a 42% differential between the top-performing and worst-performing strategies, notes Rob Doyle, bfinance's director of public markets.

Within global developed markets, the top 25% of active manager outperformed the MSCI World Index by 3.6%, though in emerging markets the outperformance was just 0.9%.

For pan-European active funds, the top quartile outperformance was 4% versus, 3.3% for US funds, 2.6% for Asia excluding-Japan, and just 0.9% for Japanese focused funds.

Quality characteristics

Looking at investment style, Value markedly underperformed across all regions, with High dividend stocks also lagging.

Generally Quality and Low-volatility are expected to outperform and show up in down markets, Doyle says, which was the case through February and March.

Looking at global developed markets, all Value characteristics were severely negative as were High Dividend factors, while High Volatility stocks also trailed.

Both Quality and Growth exposure were rewarded in the past quarter, in whichever way a manager might define them, while having a large-cap bias and momentum from 2019 both also performed well in the first quarter.

Managers with what bfinance defines as the purest portfolio exposure to the Quality style performed best in developed markets, on average nearly 8% outperformance to their benchmarks.

“Managers focused on Quality typically have significant positions in the consumer staples, healthcare and IT sectors, focusing on companies with strong competitive advantages, high levels of cashflow and business models that can, in theory at least, best withstand economic downturns.

“At the other end of the scale, managers with a dominant Value style trailed the benchmark by an average 6.4%. So if your value manager underperformed in Q1 they certainly were not alone.”

Looking at other down markets in history, quality and low-volatility managers have consistently shown their ability to outperform.

“Neither growth nor value managers have typically fared very well in these environments,” says Doyle.

“So arguably that traditional decision between growth and value is becoming less relevant given that investors now have a wide range of other styles to choose from.”

With ESG (environmental, social and governance) investing a big focus for many investors in the past 18 months, Doyle pointed out that the managers with a big a positive tilt to ESG versus the benchmark tend to be in the Quality space.

“A dedicated ESG composite is something weve looked at… ESG is not in and of itself typically considered in the context of a managers broader investment approach, so being factored in alongside other elements.”

Hedge fund and liquid alternative strategies

In hedge funds and other liquid alternatives, bfinance noted that outright positive monthly returns for the first quarter were “few and far between, except for Read More – Source