GLOBAL - Many active asset managers have underperformed the market this year despite almost perfect conditions, according to Ian Barnett, global head of investment risk at Halbis.
Speaking at the IIR Finance Performance Attribution Risk Management in London today, Barnett blamed a failure to stick with established investment process for the disappointing returns.
Volatility has fallen dramatically since last year, while cross-sectional volatility has risen and correlations have begun to normalise, Barnett observed.
"This is a perfect environment in which to add value, and yet many managers have not," he said.
Because there has been a liquidity-led recovery since March, the stocks that did worst last year are the companies which have outperformed this year, according to Barnett. Beta and value has outperformed, while momentum has severely underperformed. So managers that have focused on "quality" have therefore done very poorly this year.
Barnett pointed out that most active managers' processes aim to overweight growth at a reasonable price (GARP) - to buy "quality" at the right price. Although this process would necessarily have missed the most beaten-down, low-quality stocks that have led the rally, it does not explain the level of underperformance from some quarters: the "reasonable price" element should have generated some exposure to the value factor, which has outperformed this year.
The suggestion is that active managers paid a premium for "quality" before the rally began, and had to rotate into higher-beta stocks as the rally took off.
"Stay true to your process," Barnett advised. "Those who tried to switch around got really whip-sawed."
In a presentation that discussed the newly-important role of risk management teams at asset management firms, Barnett also emphasised the importance of generating a regular stream of empirical information for clients, "both to keep them calm during a crisis, and to demonstrate that you are following your stated investment processes".