Commentaries

December 2019 - 2019: A year of contradictions for active managers - Systematic Fund Manager's Comments

13 January 2020

Thomas de Saint-Seine

The RAM AI team wishes you happiness, good health and success in 2020. As we move into a new year and a new decade, it’s worth lending some perspective to what’s been driving markets in a year of contradictions for active managers.

Here’s our brief recap of the year:

  • 2019 will be remembered as one of the most impressive years in equity market history, with (using the S&P500 as a proxy) returns ranking in the 93rd percentile since 1962 and most major equity indices reaching highs unseen since 2009. This performance has been achieved amidst decelerating economic growth and with a lower level of volatility from a historical perspective.
  • We saw Central Banks continue to provide accommodative measures (with the Fed cutting three times between July and October), creating an ideal backdrop for stocks to rise unabated.
  • The wave of optimism in global risk assets created a significant dislocation in equity markets. The market became incredibly complacent, with the pricing of risks in investors’ portfolio largely ignored.
  • Flows into passive investment vehicles continued to support the fundamental-agnostic trade and are characteristic of cycle-end periods. As a result, the environment remained challenging for active managers; with net flows into U.S equity ETF’s exceeding $322bn* (the second largest in history). These vehicles are significantly tilted towards mega cap and growth names, which are highly dependent on foreign revenues, displaying concentrated sector and country bets.
  • At the end of Q3, we witnessed a rotation away from momentum, growth styles and defensive stocks towards value, smaller caps and cyclical areas thanks to a rebound in government bond yields and signs that trade tensions may be easing. It is too early to say whether this shift is temporary or the start of a prolonged leadership change.

Implications for 2020

While the market continues to show a preference for mega cap stocks, we see rich alpha potential in the small and mid-cap segment, especially across both Emerging Markets and Europe. EM small caps’ underperformance has reached levels unseen since the 1998 Asian Financial Crisis, with history indicating that this situation typically represents an attractive entry point for investors looking for a true all-cap approach to investing in the region. The result could be wide dispersion in stocks’ fundamentals, enabling the best active managers to identify attractive opportunities. This potential dispersion is especially prevalent within the small and mid-cap space and across the long and short books we run, and going into 2020, we hope will provide our engines with a platform for alpha generation. We’ve begun to witness this already in early 2020, with our small cap allocations becoming increasingly efficient in EM, outperforming larger caps overall, and showing their incredible alpha potential in this segment going forward.

Potential Sources of Volatility

Despite an incredibly strong 2019, uncertainties remain in global markets. As we move in to 2020, we see an increasing likelihood of volatility, we’ve listed 5 below:  

  1. Central Banks running out of ammunition
  2. Global debt has reached a new level
  3. S. protectionism increases or trade war frictions escalate
  4. Growth continues to decelerate
  5. Risk assets concentration continue to grow

A potential solution

Despite the unchartered environment we are in, the market cyclicality hasn’t disappeared. Investor’s risk concentration has rapidly been building up across financial assets, with passive investing representing a sizeable risk. Amid such a context, highly liquid, lowly correlated & diversified managers can offer a solution to navigate what could well be a tricky environment in 2020 and beyond. The value proposition of Long/Short equity investment solutions plays an increasingly important role in global portfolios.

Amid an environment of low to negative yields across Europe, our alternative fixed income strategy continues to offer investors strong performance in both euro and swiss franc terms. The strategy offers a diversified solution with contained volatility and could present an ideal long-term solution for yield conscious investors.  

As ever, our focus at RAM AI is to focus efforts across research and development of new strategies. Our current and on-going research themes include the implementation of Natural Language Processing (NLP) to better capture news-flow on companies and sentiment. Additionally, we as company are increasingly concerned about the future of our planet, and in our continuous efforts to integrate ESG elements across our different strategies, we were able to find an engaging sustainable alpha source to exploit. We are therefore developing a sustainable climate equity fund, which leverages off our proprietary machine learning infrastructure and which marries fundamental financial data with ESG data to produce an entirely carbon-neutral portfolio capable of producing alpha over the long term.

As at 28 December 2019 (Source: www.etf.com)

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