Informed Investor: Alpha/Beta Allocator Q3 2018
1. Look back at how active managers have performed YTD
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Despite some improvements, Q3 results reinforce the view that active managers have found their ability to generate alpha persistently constrained by widespread economic and political risk.
Fixed income Equity Average
By Marlène Hassine Konqui, Head of ETF Research, Jean-Baptiste Berthon, Cross Asset Strategist and Kristo Durbaku, ETF Research Analyst
Fixed income Equity Average
The Alpha/Beta Allocator6 steps to a better portfolio
48%
41%
43%
39%
47%
44%
36%
28%
31%
51%
31%
38%
2018 to date
Q3 2018 2017 10Y5Y
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Source: Morningstar & Bloomberg, data from 30/09/2008 to 28/09/2018. Past performance is no guide to future returns.
27%
33%
31%
of fixed income managers outperformed. Emerging market debt managers were again the main laggards, but US high yield managers weren’t far behind
of equity active managers outperformed as their Q2 improvement tailed off. European managers did best – albeit mainly those with a more specific focus
of all active managers have outperformed YTD. 2018 has been far more disappointing than 2017
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2. Explore the equity and fixed income highlights YTD
Informed Investor: Alpha/Beta Allocator Q3 2018 2
EMERGING 21% I 26%
US 16% I 10%
EUROPE 43% I 33%
EUROZONE 46% I 43%
JAPAN 30% I 25%
COUNTRY/AREAYTD I OVER 10 YEARS
Alpha opportunities were again most evident for European equity managers.
US IG 38% I 50%
US HY 23% I 50%
EURO GOV 28% I 19%
EURO IG 18% I 33%
COUNTRY/AREAYTD I OVER 10 YEARS
Despite some improvement in sovereign and credit conditions, alpha has still been hard to find
EQUITY% Active outperformers
FIXED INCOME% Active outperformers
EMERGING 10% I 11%
WORLD17% I 17%
WORLD30% I 38%
Hit MissSource: Morningstar & Bloomberg, data from 30/09/2008 to 28/09/2018. Past performance is no guide to future returns.
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3. Q3 Analyse the full results
Europe Large Caps Eurozone Large Caps Europe Small Caps
Germany Large Caps France Large Caps UK Large Caps
Italy Large Caps Spain Large Caps Switzerland Large Caps
Source: Morningstar & Bloomberg, data from 30/09/2008 to 28/09/2018. 50% and 33% represent the best and worst results after we divided the universe we cover into 3 sub-groups. Between those limits, “hits” and “misses” are set comparing the current quarter’s result vs. the long-term averages. Past performance is no guide to future returns.
Informed Investor: Alpha/Beta Allocator Q3 2018 3
EQUITYEuropean equities (% of funds outperforming the benchmark)
The best YTD results for active equity managers are still found among European equities, despite political uncertainty, stuttering growth and the recent rupture with Rome. Managers were able to exploit specific themes and trends which gave rise to a greater dispersion of returns. Conditions were more difficult in the US, World and Japanese markets.
YTD 2017 5 year 10 yearQ3 2018
YTD 2017 5 year 10 yearQ3 2018
32%
43%
45%
36%
33%
56%
28%
61%
15%
29%
69%
19%
81%
57%
42%
46%
55%
42%
43%
11%
3%
38%
5%
6%
62%
68%
32%
37%
46%
56%
58%
72%
50%
22%
19%
47%
30%
32%
29%
36%
27%
37%
43%
22%
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
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3. Q3 Analyse the full results (continued)
Informed Investor: Alpha/Beta Allocator Q3 2018 4
EQUITYEx-European equities (% of funds outperforming the benchmark)
“Political and economic uncertainties including trade war tensions and the Turkish crisis impeded active managers”
Source: Morningstar & Bloomberg, data from 30/09/2008 to 28/09/2018. 50% and 33% represent the best and worst results after we divided the universe we cover into 3 sub-groups. Between those limits, “hits” and “misses” are set comparing the current quarter’s result vs. the long-term averages. Past performance is no guide to future returns.
YTD 2017 5 year 10 yearQ3 2018
YTD 2017 5 year 10 yearQ3 2018
US Large Caps US Small Caps Japan All Caps
World Large Caps Emerging Markets Large Caps China Large Caps
28%
16%
32%
13%
10%
18%
17%
54%
13%
17%
57%
24%
57%
38%
57%
35%
21%
42%
29%
26%
45%
30%
49%
21%
25%
54%
53%
24%
33%
35%
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
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Informed Investor: Alpha/Beta Allocator Q3 2018 5
3. Q3 Analyse the full results (continued)
FIXED INCOME(% of funds outperforming the benchmark)
50%
30%
67%
48%
38%
14%
10%
41%
17%
11%
“Some modest improvements aside, conditions remain difficult”
Source: Morningstar & Bloomberg, data from 30/09/2008 to 28/09/2018. 50% and 33% represent the best and worst results after we divided the universe we cover into 3 sub-groups. Between those limits, “hits” and “misses” are set comparing the current quarter’s result vs. the long-term averages. Past performance is no guide to future returns.
Global Bonds - EUR HDG Emerging Debt
YTD 2017 5 year 10 yearQ3 2018
YTD 2017 5 year 10 yearQ3 2018
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
53%
44%
6%
67%
82%
72%
38%
57%
70%
50%
13%
23%
56%
86%
50%
Euro Inflation Linked US Corporate US High Yield
Euro Govies Euro Corporate Euro High Yield
95%
28%
20%
68%
19%
60%
18%
52%
40%
33%
26%
28%
16%
16%
6%
Hit: when YTD results are >50% or >10yr figure
Miss: when YTD results are <33% or <10yr figure
In Q3, global bond and IG funds benefited from an improvement in the credit cycle while government bonds were helped by the interest rate increase. Yet despite those modest improvements, conditions remain difficult year to date for fixed income active managers.
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Informed Investor: Alpha/Beta Allocator Q3 2018 6
4. Read our views on where to find alpha over the next few months
Emerging MarketsActive unexpectedly lost out to passive in Q3 after external factors like dollar strength or trade tensions drove stocks to re-correlate and investors to disregard idiosyncrasies. Not much will change in Q4. Key elections are behind us, but political uncertainties will again be to the fore. The backdrop for broader equities is adverse, but passive looks a good bet at the country level provided you look for those less dependent on oil prices. Some active managers may enjoy the greater differentiation between countries as supply chains are revamped in Asia and Latin America’s new leaders take the reins.
MISS – Hard to call given unfavourable conditions for both styles but passive just edges ahead - particularly at the country level.
USWhen the economic and market trends were clear, there was no need to look beyond passive. However, the outlook is far from certain, so there should be less outperformance vs. other countries and more differentiation between stocks. Policy tightening, the fading of the fiscal push and trade-related margin pressures should also lead to a more rational market. Stock pickers focusing on specific styles or segments could soon become more attractive, but passive should still be a hit once the sell-off dust has settled.
Verdict: MISS – Long-term disappointments among broad equity managers leave us wary for now, but it could soon be time to use more focused active or alternatives funds.
JapanBoth styles were boosted by hints of BoJ normalisation and PM Abe’s retention of power, and both styles have suffered during the recent sell-off. We still lean towards passive, but the tide may turn as next October’s 2% VAT hike looms into view. We suspect the authorities will launch some form of fiscal stimulus to try to ease the blow, but it may not be enough. Themes including China and trade, oil price movements and EM supply chains may create opportunities for stock pickers, but high correlations and a low dispersion of returns keep us wary.
Verdict: MISS – We favour passive for now given the market’s direction of travel, but will be reviewing our stance early next year.
EuropeActive fared better than passive in most European markets given the lack of any obviously positive economic or market trends. That may still be the case in Q4, with political issues in Italy and Germany likely to prove disruptive. But it’s hard to be too positive – most sectors lack the structure managers need, most stocks lack the momentum and the first ECB rate hike is probably still a year away. Brexit, ironically enough, may be a bright spot. As the finer details of a deal emerge, so should idiosyncratic opportunities to go long or short.
Verdict: HIT – Both styles will be constrained by political uncertainties but the lack of clear trends means we have a slight preference for active. The case is clearest in the UK.
Source: Source: Lyxor ETF & Cross Asset Research teams. All views & opinions as at 18 October 2018.
Over the summer, most of our Q3 calls held up well. Passive worked best in the US and Japan, but active succeeded in Europe. Active EM equity managers didn’t however repay our faith. So what’s next? Lyxor’s ETF Research and Cross Asset Strategy teams explain their view.
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Informed Investor: Alpha/Beta Allocator Q3 2018 7
5. Find out how to optimise your portfolio for this environment
US Europe Japan Emerging Markets
Passive
Broad Î = P Î
Sectors/Countries P = Î P
Style/Themes/Smart Beta P = =
Active
Mutual Funds = P P =
Hedge Funds P = = P
P Overweight Î Underweight = Neutral
Beta at reduced cost Beta Sectors/Countries Style Theme
Core Morningstar (LCUS) S&P 500 (SP5)NASDAQ (UST)Banks (BNKU)
Russell 2000 (RU2K) US Breakeven (INFU)
6. Choose the relevant ETFs
Theme
Nikkei 400 (JPX4)Quality Japan (SGQJ)
US
Japan
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Sectors/Countries Theme
France (CAC)IT (TNO)Healthcare (HLT)
Min Var Europe (MVAE)Quality Europe (SGQE)
Europe
Source: Lyxor ETF & Cross Asset Research teams. All views & opinions as at 18 October 2018 unless otherwise stated.
The ratings below reflect our ETF and Cross Asset Research teams’ views of the possible environments for both active and passive managers over the next three months. They are based on a wide range of macro-economic and market-related screens, broken down at a regional level. The ETFs in section 6 were selected based on this analysis.
Beta at reduced cost Sectors/Countries
MSCI EM Asia (LCAU)Brazil (RIO)
Indonesia (INDO)Thailand (THA)
Emerging Markets
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Informed Investor: Alpha/Beta Allocator Q3 2018 8
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DTP
1242
64