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Portfolio > Portfolio Construction > Investment Strategies

Now’s The Time for Active Investment Strategies, Advisors Say

By Michael S. Fischer

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Financial advisors in a recent survey think now is the right time to allocate more assets to active managers, given low interest rates and low return expectations.

AB, formerly AllianceBernstein, conducted a brief poll of some 200 advisors during the annual Schwab Impact Conference from Nov. 10-13.

Seventy-two percent of advisors surveyed reported that they currently used exchange-traded funds in client portfolios, but 68% said market conditions now favor an active approach to asset management. 

The poll found that advisors were particularly concerned about the safety of high-yield ETFs.

Sixty-five percent of respondents said they either did not use high-yield ETFs or planned to decrease their exposure to these funds in the coming year.

Gershon Distenfeld, director of high yield at AB, said in a statement that financial advisors were fast becoming aware that in the search for high yield in the long term, passive ETFs were a bad investment.

“The math speaks for itself,” Distenfeld said. “Over the first nine months of the year, the two largest ETFs have sharply underperformed the average active manager, not to mention their own benchmarks.

“Being tied to an index means ETFs can’t pick and choose their exposures to sectors or securities the way active managers can, and in less liquid asset classes like high yield, the average long-term investor really gets hurt going passive.”

AB’s survey also showed that 30% of financial advisors felt they lacked a good understanding of the liquidity issues influencing the fixed income market.

Those who purported to understand the risks of liquidity said it was the most significant cause of concern that prevented greater adoption of high-yield ETFs in their portfolios. 

Financial advisors’ biggest concerns for investing in high-yield ETFs:

  • Liquidity issues: 32%
  • Underperformance relative to actively managed fixed income funds: 22%
  • Complexity of the asset class: 12%
  • Hidden fees: 4%
  • Other challenges and issues: 30%

“While the lack of liquidity in the market is clearly a risk, it can also provide an opportunity for additional returns to active managers that are able to stay out of crowded trades and keep cash on hand,” AB’s head of credit Ashish Shah said in the statement.

“Every financial advisor should be asking money managers what they are doing differently in this low liquidity environment — and the answer is clearly ‘nothing’ if you are using a passive strategy.”

This year, some ETF sponsors have sought Securities and Exchange Commission approval for “nontransparent,” actively managed, ETF-like funds.  

— Check out Advisors Say Smart Beta, Active Funds Will Boost ETF Growth on ThinkAdvisor.

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