News

January 2016

As US Public Equity Bull Market Ages, Savvy Investors Remain Mindful of Behavioral Traps

As US Public Equity Bull Market Ages, Savvy Investors Remain Mindful of Behavioral Traps and Navigate the Active-Passive Debate Based on Individual Long-Term Goals, Not Recent Market Performance, Says Cambridge Associates

Boston, MA (Jan. 7, 2016) – Passive U.S. equity strategies – which track the performance of the overall U.S. stock market – have performed increasingly well over the last several years, as the U.S. bull market has charged forward. Compared to passive funds, active managers – who make specific investment with the goal of outperforming the broader market – have by and large shown lackluster and uninspiring performance.

But when a bull market ages, investors should remember to avoid common behavioral mistakes – like abandoning long-term goals to chase strategies based on strong recent performance – and may benefit from not piling into passive index funds because of their success over the last several years.

That’s a message from “Revisiting Active U.S. Equity Management: A Cyclical Story,” a research report from Cambridge Associates. Cambridge Associates is a global investment advisor to institutional investors and private clients.

“Index investing is clearly in line with some investors’ needs and circumstances. But it should be those individual circumstances driving the decision-making when it comes to passive investing – not the performance they see in the rear-view mirror,” says Kevin Ely, Managing Director at Cambridge Associates, and author of the report.

Beyond long-only equities, one reason savvy long-term investors may be allocating more to actively managed asset classes, like hedge funds and private equity, is that they are wary of broad exposure to today’s U.S. stock market. They are seeking pockets of opportunity, instead of owning the whole market.

Though U.S. index funds have outperformed active managers in four of the last five years, the opposite was true in four of the previous five, the report points out. “A long-term look at the market clearly shows that investors should make sure they do not blindly follow momentum into index bubbles,” says Ely.

He notes an example: In the lead-up to the tech bubble in the early 2000s, active managers that strayed from technology stocks were punished severely for a few years but later rewarded handsomely. Meanwhile, investors who bought the Russell 1000® in 1999 would have inherited an outsize technology exposure – and the pain that came with it when the bubble finally burst.

“The fact that active long-only strategies have underperformed passive index funds for the majority of the last five years does not justify whether or not an investor should move into active or passive strategies today,” says Ely.

“The merits of index investing are clear and well aligned with some investors’ needs. But investors’ individual circumstances and long-term perspectives should determine their active and passive allocations – not the recent outperformance of U.S. index funds,” he adds.

 

This release is provided for informational purposes only. The information presented is not intended to be investment advice. This is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not indicative of future returns. The Russell 1000 Index is a comprehensive large-cap index measuring the performance of the largest 1,000 U.S. incorporated companies, the Russell 1000 Index is reconstituted completely on an annual basis to ensure the index measure the large cap segment consistently and objectively over time. Broad-based indexes are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Any information or opinions provided in this report are as of the date of the report, and CA is under no obligation to update the information or communicate that any updates have been made. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified.

Copyright © Cambridge Associates LLC 2015. All rights reserved.