Market Update

Passive - Active - Absolute
Passive strategies thrived with strong markets and low fees, but a correction could limit returns. Active products aren’t the solution—consider absolute return strategies for better performance.
Passive investment strategies have experienced a huge boom in recent years. The success was based on good stock markets and low fees. We wrote in our last newsletter that, in our view, the stock markets have achieved excess returns in recent years compared to the fundamental development of the global economy and that this will decrease over the next few years, which could result in a correction or a longer sideways market . In this scenario, index products are not interesting because there is no return over a long period of time, as we saw after similar valuations in the late 1990s or before the global financial crisis in 2008. In 2022, the volume of index products fell for the first time in years due to weak performance. This will again happen if investors are dissatisfied with the returns and make redemptions. This leads to the sales of the underlying securities and thus to continuous pressure on the returns of passive products, such as ETFs. We would not recommend switching from passive long-only to active long-only products because this hardly changes anything. Many active products have such narrow investment guidelines that they are still very close to the index, but charge higher fees, which ultimately does not help the return. We would go one step further and select products that have an absolute return target and do not want to track an index. These managers are completely free to choose their investments and only buy what will achieve a higher valuation within a reasonable period of time. Managers can also use futures to hedge their portfolios against market corrections or sell short individual securities where they expect lower valuations. This approach focuses on generating alpha and is therefore largely independent of stock market developments. Absolute oriented investment products – and this includes hedge funds – work particularly well in markets that move sideways for a long time because in such an environment, without market stress, managers have the opportunity to generate an attractive alpha on the long and short sides of the portfolio. The following “In the spotlight” section shows the benefits of the absolute investment strategy achieved with the CB Greater China Portfolio (USD). Page 2 of the newsletter shows that the risk in technology ETFs is greater than expected and what a possible addition could be.
Published by
Stefan Steiner
October 8, 2024
October 8, 2024