As has generally been true since the market turn in 2009, active investing over the last five years has been especially difficult. Traditionally, active wealth management meant active investors sought to buy the highest quality companies at the cheapest price. However, a review of stock prices since 2014 reveals this strategy has been hard to successfully execute.
Performance Over the Last 5 Years
The light blue line below is the S&P 500 index, including dividends. The dark blue line is the iShares Edge MSCI USA Quality Factor ETF (QUAL). QUAL tracks the investment results of an index that measures the performance of U.S. large- and mid-size stocks as identified through three desirable fundamental variables: return on equity, earnings variability, and debt-to-equity.
The purple line is the SPDR® Portfolio S&P 500® Value ETF, a fund that offers exposure to S&P 500 companies that could be undervalued relative to the broader market.
Source: Yahoo Finance as compiled by CIG Asset Management
As you can see over this period, Value stocks have returned about 40% of the S&P 500’s return. While Quality has produced less than 85% of the same.
Of course, it’s good to exercise caution when looking at graphs like these. Maybe this is too optimistic of a view. For example, hedge funds seek to isolate the Quality factor even more. They will typically buy the top 20-25% of desired companies and bet again a similar percentage of low-quality companies. Many hedge funds have generated little or no return over the last five years. As a result, many have gone out of business.
Similarly, we should not rule out that the Quality and Value stocks have gone up some amount because generally, most stocks have gone up over this period. We saw that phenomenon recently in January and February 2019.
Active Wealth Management – CIG’s Approach
Active investing has often been difficult, but out-performance is even more challenging given this environment. CIG focuses on adding value to client portfolios by managing both risks and returns. From 2015 to 2017, CIG employed a different kind of active management featuring a relative strength-focused investment strategy which we thought was appropriate for this type of market. This strategy worked in some years but not all of them. During 2018, an adjustment was made to the strategy incorporating a longer-term, more passive approach with some shorter-term tactical strategies.
We recently went through one of the tougher quarters in many years. Such corrections can provide opportunities for active management and highlight the value of CIG’s approach. If one looks over the longer term, active and passive out-performance trends are cyclical as shown in the chart below. Just when it looks like active or passive management has settled the competition, the performance trends change.
Source: Morningstar
CIG’s goal is to provide the flexibility of active wealth management to reduce exposure on the downside and ramp up exposure to capture return when we determine it to be appropriate. While this more “benchmark-tethered” approach is less likely to produce significant divergences both positively or negatively from market results, we can still react to dramatic event risks by changing the portfolio allocations while also keeping clients invested for the long haul. Staying invested in the market and enjoying the benefits of compounding while monitoring downside risk may increase the chances of achieving investment goals and elevating your success!
Next Steps
The professionals at CIG can help provide you with the flexibility of active wealth management. As a result, reduced exposure on the downside and ramp up exposure to capture returns. If you’re interested in learning more about how a CIG Capital Advisor professional can help, email Brian Lasher.