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Why passives could trigger ‘panic mode’ for investors

Why passives could trigger ‘panic mode’ for investors

In our latest edition of ‘Selector Snapshot’, an investment professional discuss the problems both active and passive investors could be susceptible to.

Selector: Caron Bastianpillai

Company: Notz Stucki & Cie

Although passives may continue to gain market share from active managers, investors are realising that many of their active managers underperform in the long run.

However, one should wonder what would occur if global markets had a massive pullback following a bull market that has been 101 months in the making.

Investors should keep in mind that the tech bubble that ended in March 2000 lasted 113 months.

The inevitable question arises as to who will be on the other side of the trade when that happens, as there is bound to be an overshoot to the downside when everyone sells on panic mode.

Elsewhere, violent sector rotations have also become increasingly prevalent in equity markets, creating significant challenges for active managers.

Where passives may run into trouble, is during side ways markets and this is when active managers should be able to outperform.

Generating alpha

Generating alpha has become very difficult during various quantitative easing initiatives in China, the US, Japan and Europe followed by an environment of zero - or even negative - interest rate policies in the latter two regions.

Election results have also sparked sharp rallies producing double-digit returns in equity markets such as Japan, India, Argentina, Brazil and, more lately, the US. This is, however, all based on hope and not on fundamentals.

Chasing market beta has been the layup trade of the decade; any announcement of quantitative easing has turned out to be a catalyst for a significant market rally in the equity markets of these regions.

Looking back one would have made sizeable gains chasing market beta in China, the US and Europe.

A full breakdown of Bastianpillai’s views on passive investments will be available in the next edition of the Citywire Selector magazine, available early September. You can request a copy of the magazine here.

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