The next leg of the bull market could be fuelled by an unexpected source: the investment pros that have been lagging the market.
Investing is hard. And trying to beat the market is even harder. Countless numbers of studies show that less than half of the investment professionals trying to beat the market fail to do so.
And the few that do beat the market in a given year are almost never able to replicate that kind of performance.
“2015 has been another tough year for active fund management,” BMO Capital Markets’ Brian Belski observes. “In fact, based on the funds we track only about 28% are outperforming well below the historical average. This is compounded by the fact that 2014 was one of the worst years ever for active fund management.”
“Not surprisingly, outflows have increased rather significantly,” Belski added.
This devastating combination of underperformance and outflows will be tolerated for only so long until the portfolio manager eventually gets fired. And as such, the risk/reward balance for the portfolio manager shifts in such a way that it becomes increasingly attractive to take on a big risk.
For Belski, all the conditions mentioned above is bullish.
“From our perspective, this poor track record has been a result of fund managers being too inactive and defensive with their portfolio positioning,” Belski said. “However, given the level of underperformance and outflows, fund managers will likely have an added incentive to position portfolios more aggressively between now and year-end to play “catch-up” — something we believe will be a strong positive for market performance.”
This is not to say that the relative performance of these active managers will improve. All it means is that there could be a lot of buying going on as these pros position their portfolios for their clients’ monthly and quarterly statements.
Regardless of what you think of these active managers, it is important to acknowledge that they represent a massive amount of money in the markets, and what they do can move markets.
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