To the Active Managers Go the Spoils in 2014: Natixis

Among other predictions for the rest of the year, Natixis sees a sharp split between winners and losers in the stock market, spelling middling results for indexers.

Natixis held a webinar on Thursday from the 2014 Morningstar conference in Chicago. Evan Cooper, editorial director for Asset TV, moderated a panel on market outlook for the remainder of the year with executives at firms associated with Natixis: Chris Wallis, CEO, CIO and senior portfolio manager for Vaugh Nelson Investment Management; David Rolley, vice president of the fixed income group at Loomis, Sayles and Co.; and Scott Schweighauser, partner, president and portfolio manager at Aurora Investment Management.

Equities

Wallis said equity markets are “fairly valued” and that investors can expect low- to mid-single-digit returns if they buy the broader market.

The challenge, he said, is that there market is no longer “bullish or bearish. It’s just going to be a market; it’s going to churn.” That will lead to greater dispersion between winners and losers, which means investors will be much better off looking for highly active managed, targeted investments instead of investing in broader indexes.

Wallis said that the days of buying an asset class or buying a sector are over, to the benefit of investors. “What we like about the current environment is there isn’t one area you can focus on. We may in fact not like banks, but have a large position in a specific bank.”

We’re at a point where “policy actions have had their intended effect,” he said. Now we have to manage the “unintended consequences” that come out of the decision to keep current policies or change them. “It’s going to create distinct winners and losers,” Wallis said.

Wallis said that his firm hasn’t reduced its expected return, but they understand that it’s going to come from “very stock-specific factors, not any generalized market or sector factors.”

He added that there isn’t a large valuation disparity between market cap ranges, but acknowledged that outside of small-cap environment is more targeted, but expects it to normalize over the medium term.

Fixed Income

Yield and volatility are low and spreads are tight, Rolley said. “All of this is by policy intention because if you think about it, what central banks have been trying to do is reflate the global economy, but they’re doing it by deflating the income opportunities in our asset class,” Rolley said.

The current bond market is in a “pause,” he said. “It’s very calm and very quiet, but I don’t think that the yield environment today is the same one that we’re going to have in a year.”

“It’s an easy-money world, and it’s not just the Fed that’s providing extraordinary liquidity. You could say the same thing about the European Central Bank and you could say the same thing about the Bank of Japan. That’s most of the global benchmark right there.”

Rolley said that as value managers, Loomis Sayles has been able to find opportunities when investors get concerned and react to global changes. For example, “last year when taper talk began and emerging markets were sold off, we were able to find values in both some of the currencies there and some of the companies.”

Another place Loomis Sayles is finding value is in the corporate space due to “investors’ fear of event risk,” Rolley said. “There’s been more merger and acquisition activity and most of the time you think that would be bad for a bond investor” because that usually results in a more aggressive capital structure, which lowers the price of bonds. “You have to under-own those companies going in so you can look at the story, see what they’re going to look like after a transaction, and maybe then you can buy them and make some value.”

One of the biggest debates in global fixed income, he said, is future liquidity provision. Some investors believe that the Fed will stop quantitative easing soon and that there’s a “reasonable expectation” of an interest rate hike in 2015, but that “it won’t matter however, because we’re going to get the liquidity from the Europeans and the Japanese.” He couldn’t fully support that outcome, though. “I still think the U.S. dollar is the biggest market in the world. The Federal Reserve is the most important central bank in the world, and when they go back to something that looks more like the traditional central banking rule book, the market will struggle with these valuations.”