Changing the narrative on active management

Changing the narrative on active management

The primary goal for most investors? A positive investment outcome that aligns with their objectives and evolves as needed over time. Looking ahead, disruption will change the market environment and returns may be more difficult to find. Investors may have to work their money harder to achieve the goals they seek.

Here’s how active asset management can add value against that backdrop.

Active asset management is a term often used to describe the process of selecting securities and measuring them against a benchmark index – but that’s only part of the equation.

We see active management as a partnership, built around identifying clients’ needs and using a toolkit of strategies to meet those needs and making adjustments over time – particularly as financial conditions become more uncertain.

This toolkit should include expert capabilities within and across asset classes that help active managers guide their clients in a way that is truly product-agnostic. It will likely include investment opportunities that may be unavailable to passive investments.

Why active management now?
Investors have benefited from an extended bull market in equities and bonds, but lower real returns are expected in coming years. CEO Andreas Utermann says the alpha that active managers can generate will be vital in protecting against inflation and delivering returns.

This flexibility helps active managers seek out and take advantage of individual opportunities that arise from turbulent or inefficient financial conditions – such as the environment we’re seeing today.

Importantly, it can help deliver outperformance. In fact, our research shows that during the 2000-2002 tech-market crash and the 2008-2009 financial crisis, US large-cap active managers outperformed their passive peers by 471 basis points and 100 basis points, respectively.

How the market environment is changing

Correlations between stocks have declined markedly after almost doubling post-crisis – see chart. (Correlation measures the tendency of securities to rise or fall in tandem; a correlation of 1 means securities rise or fall in lockstep, while a correlation of -1 means they move in opposite directions.)

After nearly doubling post-crisis, stock correlations have recently declined
S&P 500 Index correlations, January 1991 to December 2017

Source: AllianzGI Economics & Strategy. Data as at 31/12/2017.

In fact, Credit Suisse found that in December 2017, three-month correlations between S&P 500 sectors fell below 20%, close to their lowest-ever level.

Many forward-looking active managers have expanded and diversified their strategies to offer new asset classes and new markets, including private markets. This puts them in a position to add value by seeking out additional sources of return that, we believe, will become increasingly hard for less actively managed strategies to find.

Even so, a shift in market conditions is not enough to prove the case for active management. Deeper changes are afoot in markets, and active management will be key to navigating the new environment.

Next: Warning: disruption ahead

Investing involves risk. There is no guarantee that actively managed investments will outperform the broader market. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

Sources for study of US large-cap active managers: Morningstar, S&P 500 Index, Allianz Global Investors. Data as at 31 December 2017. Allianz Global Investors created the “Active Large Cap Blend” category by including only those Morningstar “Large Blend” category constituents that are not defined by Morningstar as index funds. Institutional share classes only. Excess return relative to S&P 500 Index, calculated monthly. Net of fees.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

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