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How to Catch the Active Investing Wave  🌊

We predict that active investing is back.  Since 2009 the Federal Reserve has had an accommodative monetary policy and an expanding balance sheet, that may be over.  The outperformance of the US stock market relative to the rest of the world may have temporarily peaked for a variety of reasons.  The Mega Caps that led the way, really since 2009 may have had their day in the sun, the problem is they are still a big weight in the S&P 500.  If you want to read more about our thoughts on why we think active investing is back, check out this article.

So what if you aren’t an active investor or your firm focuses more on passive strategies?  How can you capitalize on the opportunity in front of us?  The good news is there are ways to incorporate active investing into client portfolios without changing your entire strategy:

• Create a discretionary portfolio that you or someone at your firm manages, make small allocations for clients whose risk tolerances allow for this.  If one were to index 70% of an equity allocation and pick sectors and/or stocks effectively for the remaining 30% this could be a significant driver of alpha.  Check out our High Conviction Idea subscription to help with this.

  • Keep an eye out for opportunistic times to invest in other geographies.  We are of the opinion that returns in many markets outside the US may be superior for the near to medium term.  

• Find a 3rd party active manager whose investments you can utilize for client portfolios.  Again, even small allocations can make a difference when it comes to capturing alpha.  Here are some things to look for in an active investment manager:

  • Investment managers that describe their strategy as tactical.  Tactical implies they are making decisions to take advantage of changes in economic and market cycles or changes within sectors or asset classes.  However, you will further want to ask what the turnover is in such a strategy, if the manager is changing the entire composition of the portfolio every few months, run the other way, unless a plethora of taxable events are your thing.

  • Time in markets.  It's often best to seek an experienced money manager that has seen his/her share of economic cycles.  The muscle memory from living through prior cycles comes in handy because after all history doesn’t repeat, but it often rhymes.

  • Investment managers that incorporate macroeconomics into their investment decision-making process.  Many managers describe themselves as “bottom-up” meaning they really care primarily about the fundamental merits of a company and are less concerned with the world around it.  The manager should not be macro agnostic in our opinion.

  • For the international exposure suggested above look into active managers that have a broad mandate when it comes to international investments as well as a strong track record.

• Use funds or products with an active component. Depending on what products you use, look for funds with a more active and/or nuanced approach.  Things to look for in various fund strategies for diversification and alpha:

  • Low correlation to the US equity markets.  Often a way to derive alpha is to have exposure to markets outside the US that have their own favorable drivers.  Similarly, commodity markets as a whole have little correlation to US equity markets.  There are a number of accomplished commodity investment funds that can help with alpha generation.

  • Small Cap Funds.  In my career I have come across several small cap managers with excellent track records.  The simple reason is that there are more inefficiencies to be exploited in small caps in comparison to larger cap stocks where significant inefficiencies are harder to come by.  Larger cap stocks often have a dozen or more publishing equity research analysts writing opinions on them whereas small cap stocks often have few to none.

  • High Yield Debt Funds.  You know what they say; bond investors are the smartest people in the room.  Competent high yield managers do the fundamental hard work, cranking away on balance sheets and income statements and stress testing cash flows.  I have encountered several high yield managers in my career that generate equity type returns with a portfolio of bonds.

The market tides are shifting and what has worked in the past may not necessarily be as effective in the future.  Hence, we think active investing will serve you well as an addition to your largely low-fee, passive practice.   We hope you find some ways to incorporate it into your client portfolios.  Feel free to reach out if you want to talk about active investment ideas or learn more about what we do!  [email protected]

 Cheers!

Frank & the Grinnell Capital team

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IMPORTANT DISCLOSURES:

Advisory services are offered through Grinnell Capital, LLC, a Utah Investment Advisor.

This information is a general publication that reflects our opinion and is not a specific recommendation to any one individual. You must consult your own broker or investment adviser for investment advice.

This newsletter is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized advice and is subject to change without notice. This material should not be considered as a solicitation to buy or sell any asset or engage in a particular investment strategy. Investing in securities involves the risk of loss, including loss of principal invested, and may not be suitable for all investors. Past performance is no guarantee of future results. This newsletter contains certain forward-looking statements which indicate future possibilities. Actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that any views and opinions expressed in this newsletter will come to pass. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Additionally, this newsletter contains information derived from third-party sources. Although we believe these sources to be reliable, we make no representations as to the accuracy of any information prepared by any unaffiliated third party incorporated herein and take no responsibility, therefore. This newsletter is provided with the understanding that Grinnell Capital, LLC is not engaged in rendering legal, accounting or tax services and we recommend that client seek out the services of professionals in these aforementioned areas.