- Passive investing has surpassed active investing in the U.S.
- The trend may be changing soon, according to Jill Carey Hall, U.S. equity strategist at BofA Global Research.
- Only 47% of assets under management in the U.S. are overseen by active funds, down from 80% in 2009.
- The flow of funds from active to passive funds has slowed down recently.
- Clients of BofA Securities are now buying more single stocks than exchange-traded funds.
- The current market environment presents opportunities for stock picking.
- The market leadership is expected to broaden this year.
- Carey Hall’s team expects a pickup in volatility, which is good for stock picking.
- Investors should consider stocks that behave differently and offer high dividend yields.
Passive investing has gained significant popularity in recent years, overtaking active investing in the U.S. However, this trend may be on the verge of changing. According to Jill Carey Hall, U.S. equity strategist at BofA Global Research, the flow of funds from active to passive investments has slowed down recently. Additionally, clients of BofA Securities are now showing a preference for buying single stocks rather than exchange-traded funds. These shifts in investment behavior indicate a potential shift towards active investing.
The Rise of Active Investing
Active investing involves frequent buying and selling of stocks or other investments, while passive investing follows a buy-and-hold strategy with minimal trading. Over the past decade, the amount of assets managed by passive funds has surpassed those overseen by active funds. In 2009, 80% of assets under management in the U.S. were overseen by active funds, but now that number has dropped to only 47%. The poor performance of some active funds and the lower fees associated with passive funds have contributed to this shift.
Changing Market Dynamics
In the current market environment, there are elevated valuations for stocks and a high dispersion of major indexes. This means that stocks do not tend to move in sync with each other, creating opportunities for stock picking. Carey Hall expects the market leadership to broaden this year, with more stocks participating in the market rally. This increased participation enhances the chances of selecting outperforming stocks.
Considerations for Active Investors
Investors looking to become more active this year should be mindful of certain factors. Carey Hall recommends considering stocks that behave differently within certain sectors. Some sectors, like healthcare, exhibit less correlation and more dispersion among stocks, making them attractive for active investors. On the other hand, sectors like energy are more correlated, often driven by external factors like oil prices. Additionally, high dividend-paying stocks may be appealing in an environment where short-term interest rates are peaking.
The dominance of passive investing in the U.S. may be reaching a tipping point, with a slowdown in the outflow of funds from active to passive investments. Factors such as the rise of individual stock picking and the potential for increased market volatility suggest a shift towards active investing. Investors should consider the opportunities present in stock picking, particularly within sectors that exhibit less correlation and more dispersion among stocks. As the investment landscape evolves, active investing may offer new avenues for generating returns.