— Stock prices are likely to be more volatile in 2017
than in recent years, a change that should benefit
was the consensus among money managers and analysts who
last month gathered for the Star Tribune’s annual
Investors’ Roundtable discussion at the newspaper’s
office in Minneapolis.
several years, individual investors have increasingly
steered away from mutual funds and other investments
that are run by professional money managers and turned
instead to lower-fee index funds that simply track broad
segments of the market.
the first 11 months of 2016, a record $286 billion was
pulled out of actively managed investments and $429
billion poured into passive ones like index funds,
Morningstar reported last month. Still, more money is
invested in active strategies than passive.
very fair to say that the passive investment theme
through ETFs or index funds is certainly the flavor of
the day," said Roger Sit, chief executive of
Minneapolis-based Sit Investment Associates and a
participant in the roundtable.
firm has 14 actively managed mutual funds and one
exchange traded fund, the Sit Rising Rate ETF, which is
designed to help investors hedge against rising interest
is a point in time when passive does better than
active," Sit said. "The keys appear to be the
predictability of when there will be uncertainty and
volatility," Sit said.
is biased toward active management but believes there is
room in portfolios for both active and passive
a higher volatility environment he believes active
managers do more than just look to beat benchmarks.
"An active manager is managing your downside
risk," he said. "It’s not just participating
in the upside."
appeal of passive investments has been aided by the low
volatility environment that was a by-product of
extraordinary monetary policies of central banks in the
United States, Europe and Japan in recent years to
prevent a recession.
that environment is changing as the Federal Reserve
takes the lead in raising interest rates. As well, the
arrival of a new U.S. president brings the prospect of
greater swings in prices of stocks and other investments
as investors adjust to different priorities and
going to have a little more volatility but more
confidence associated with it, and I think that could
help active" investments and managers, Jim Paulsen,
chief investment strategist for Wells Capital
Management, said at the roundtable discussion.
investment strategies began in the mid-1970s with John
Bogle’s Vanguard Group, one of the earliest proponents
of index-based funds. For years, they appealed chiefly
to individual investors. But data shows that
employer-sponsored 401(k) plans, public pension plans
and endowment funds are all devoting more money to
passive strategies than they have in the past.
trend of more money moving toward passive accounts has
had an effect on local firms, including
Minneapolis-based Piper Jaffray Inc.
a filing with the Securities and Exchange Commission on
Dec. 22, Piper Jaffray said that as part of its annual
review of goodwill on its books, it will have to take a
noncash impairment charge of $75 million to $95 million
due to net outflows of funds from the company’s Asset
management believes that these net outflows are the
result of an extended cycle of investors favoring
passive investment vehicles over active management,
combined with certain investment strategies having
performance below their benchmarks," the company
said in the filing.
Smith, chief strategy officer of Piper Jaffray, said the
charge has no real impact on its bottom line and the
firm is committed to the asset management business.
"We like the business as part of our mix,"
Smith said. "It’s a noncash charge and not
reflective of the business itself. It’s just an
calls the recent environment a "low dispersion
market" in which the average stock moved about the
same as the overall market. That will change as interest
rates rise, he said.
a higher, more normalized interest rate environment, you’ll
start seeing more dispersion," Smith said.
who rely on more active management of their holdings are
likely to fare better than passive investors when there
is more dispersion.
Investments, the Boston-based financial giant chiefly
known for its actively-managed mutual funds, recently
responded to the demand for passively run investment by
launching six ETFs to its roster of passive managed
said he doesn’t expect to follow Fidelity’s example.
add products if we think we can leverage our core
competency," he said. "Our core competency on
the equity side is growth equity, high-quality
investing, focused on fundamentals."