Every financial institution quite frequently expresses an opinion on stock market conditions and possible direction in short, mid, and long term. Final months of year 2022 and first ones of year 2023 were full of screaming headlines with different future prognoses. These headlines were changing all the time in accordance with actual events that were happening in markets driven by economic or political reasons.
In the last quarter of 2022 most common view of analysts was expressing high probability of complicated beginning of 2023 with a big drop in prices of stocks and bonds, however that didn’t happen. Moreover, many bankers where betting on weaker US dollar, this bet only partially paid off. Economy of US and EU had to fall into recession at the end of 2022 – this scenario didn’t happen either.
The picture suddenly has changed in January of 2023, when encouraging inflation slowdown data has forced the change of markets direction and most values of different asset classes unexpectedly were growing. On these circumstances, the messages of financial institutions suddenly have changes. They were beginning to accompany much brighter outlook.
However, it didn’t take long for outlook to change again which had a sharp U turn already in the March.
What a hell is happening? And what is the purpose of these market outlooks when reliability on them is hardly predictable?
The actual view of the market seems to be challenged and de-focused all the time. Every single piece of information is highlighted with prospects to turn the trend upside down. However, in most of the cases these pieces of information isn’t so important in the sense of changing general direction of the market. Very often this contradictory information flow creates more intentions to do investment decisions that are much more beneficial for transactions fees collectors than for the investment portfolio itself.
This undifferentiated noise not only is leading us to the confusion but again opens an important topic for the discussion. How could we compare actively and passively managed fund strategies? What strategy is a better one? Many investors are raising these question time to time.
For the comparison I’ve taken very well-known actively managed tech fund “ARK Innovation ETF”. It’s managed by a famous fund manager – Catherine D. Wood. And compared it with a Nasdaq Composite index in the graph below.
Data source: Bloomberg
Taking the period from the inception of the ARKK fund we can clearly see a very high deviation between these two asset prices. Of course, it would be convenient to make concrete conclusions on the superiority of one or another asset, on the other hand this task is too tricky at the end. In these circumstances just one condition is relatively convincing, that extremely important component becomes the timing. There are many clear periods when one asset outperforms another one. And specially the year of 2022 and 2023 are market with very painful period of the bad performance for ARKK fund holders.
Very often the question of a superior asset management strategy is raised. There is a substantial pool of data that supports the fact that less than half of actively managed funds actually beat market indexes in the long run. This statistics is put on the table often when critics take on higher management fees of active funds in comparison with passive ones.
Contrary, quite often is forgotten to emphasize that with the higher management fee you are purchasing the opportunity to outperform the market, get the exact investment strategy you want, flexibility of the products, composition of your preferred investments and many other things. The ability to choose will always have a price, independently from the perspective of the return. The opportunity to outperform doesn’t become a guaranty of such a fact.
Another shortfall of the performance comparison between active and passive funds is the time frame. The statements of a better long term performance very often can sound a bit hypocritical. Taking into consideration how fast our daily lives are changing nowadays. And how our investment and saving decisions are interrupted during different periods of our life. 50 years period of periodic and regular investment in index trackers generally is more theoretical condition then the reality that we are living in.
One year we could have sufficient funds for extra savings another year the situation can drastically change. Uncertainties, such as work, health, family, and personal development will always stay in front on our life’s unpredictable path.
Active managed funds offer us options that could be more adjustable to the stages of our adulthood life. And these options, of course, have the price. On the other hand, passive funds can be a part of all life lasting investment decisions. Both strategies have the right to exist and to complement echo other. In that way filling the spectrum of investments products more complete.