INVESTING
ters between those bookends , EPS grew 55 %, 63 % and then 53 %, according to data from T . Rowe Price .
Meanwhile , the rest of the S & P 500 ( or the “ S & P 493 ,” as they ’ ve been jokingly called ) lost 8 % in the second quarter of 2003 and saw 0 % growth in the next three quarters . But then in the second quarter of 2024 , these names saw 7 % EPS growth , T . Rowe Price says . The broadening of the market began .
Since then , both the Mag 7 and the rest of the index have continued to do well , the seven mega-caps logging 19.17 % quarterly growth while the S & P 493 ’ s average quarterly figure is 11.33 %. “ There is a risk in concentration that is recognized by most managers . Passive investors don ’ t have to worry about it because they take what the index gives them ,” Polak says . “ But with the broadening of the markets , there ’ s going to be a lot more opportunity , more shots on goal .”
Polak expects those opportunities to include dividends coming back into play , providing a good chunk of return , while international investments could get a boost because there will be less of a chasm between U . S . and non-U . S . returns . He also sees more diversification in portfolios .
“ All of that speaks to active management ,” he says .
Lower Returns And Increased Volatility
Many asset managers have constructed economic outlooks for 2025 and beyond that forecast a period of lower equity returns and higher bond returns than have been seen in the last decade .
But there ’ s more to the economic story than that , says Kristy Akullian , a BlackRock veteran who leads iShares investment strategy in the Americas . There ’ s also increased volatility .
“ Looking ahead to 2025 , we expect it to be a year of many shifting narratives and probably shifting market performance and rotation , even within equities ,” she says . BlackRock controls $ 11.5 trillion in assets .
Part of that story will be the policies emerging from a new U . S . presidential administration , the Federal Reserve ’ s continued tinkering with interest rates to combat inflation , the path of inflation itself , and global political disruptions , she says . “ Certainly , there are a lot of ‘ known unknowns ’ coming towards us ,” she says , but adds that the shifts will work to the benefit of active managers . In fact , the changes may occur so rapidly throughout the year that active managers will have an advantage in a basic activity — rebalancing , a common part of good portfolio management .
“ The average investor , and even the average financial advisor , is not going to be rebalancing as frequently as we think rotations could happen ,” Akullian says . “ I think it is going to be an action-packed calendar in terms of the events that could change the direction of market performance . That in and of itself creates an environment where either you need to be prepared to rebalance more frequently or you need to allocate to funds that do that for you .”
The Overlooked Pitfalls Of Passive
Critics of passive investing say one aspect of it isn ’ t mentioned enough : that its objective representation of value is a mythical beast . Benchmarks are a representation of investor sentiment about value . And they get pushed around one way or another when sentiment reverses course .
“ This hits on something that ’ s really fundamental to how the markets have changed over the last 15 to 20 years ,” says Eric Veiel , head of global investments at T . Rowe Price , which has $ 1.67 trillion in AUM . “ As passive has grown as a percentage of the overall market , the elasticity of the market has changed . Every dollar that flows into the market now has a greater impact on price to the upside just like every dollar that flows out has a greater impact on price to the downside .”
Take what happens when the Fed balks on a rate cut . If that happens , the market drops . But when an incoming administration promises regulatory easing , the market rises . Yet the companies held in the benchmark haven ’ t changed .
“ Getting too caught up in all that noise usually leads to bad decisions ,” Veiel says . In some cases , he says he will make opportunistic changes to the firm ’ s overall approach when he sees really good risk- adjusted returns . “ We will take advantage of that fear-greed continuum when it ’ s out of whack , but only on a marginal basis . What we ’ re really trying to do is strategically set our asset allocation for our clients to help them meet their end goals .”
The Best Attributes Of Active Management
And then there are a host of other attributes that good active managers exhibit , say their proponents . Active managers can react to the markets in a good way , using their research and knowledge to tease out opportunities the benchmarks don ’ t reflect , Polak says .
Active managers can also diversify in ways that the indexes can ’ t , Akullian adds . For example , an active manager who doesn ’ t trust the outlook on longduration bonds can shift to liquid alternative strategies , she says . That ’ s also what Veiel calls “ having broader solutions for our clients in a multi-asset way .”
Mike Roberge , CEO and chair at MFS Investment Management , which actively manages $ 636.8 billion , says that one of the strongest rationales for active managers is that they can actively manage risk . And one of the recent risks the market has seen is the Mag 7 concentration , he says .
“ If I take the Russell 1000 Growth Index , those seven stocks are now approaching 50 % of the benchmark . Seven stocks ,” he says . “ So is that a diversified portfolio ? We would argue not .”
When the market has historically become this concentrated , Roberge says , those benchmarks tend to underperform . “ I would say those might be the easiest benchmarks to beat over the next three to five years ,” he says . “ And so our ability to manage risk — which we think now is to not be overly exposed to those stocks , to be able to add value through the cycle , to engage with the companies we invest with rather than just buy all the companies , to improve their business , improve the returns — provides risk-adjusted returns for clients over time .
“ We continue to think that ’ s relevant , and our clients continue to think that ’ s relevant .”
38 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2025 WWW . FA-MAG . COM