Get those spirits up, active managers.
Even though it's easy to understand why active managers would be feeling downtrodden right now vs. their passive peers. According to Jefferies, the performance of actively managed funds lagged behind passive funds by 61 basis points in 2017. "We think the biggest hurdle for active [funds] was the lack of volatility in which the VIX index [volatility index] set a record for the calmest year," writes Jefferies equities strategist Steven G. DeSanctis.
DeSanctis does see the environment for active managers improving modestly in 2018. Here are his main reasons.
Welcome Back Inflation
With the U.S. economy poised to receive a jolt from the new tax law, inflation could be a friend to active managers.
"Inflation is starting to show signs of a pick-up and the Fed could raise rates four times this year," says DeSanctis. "If we finally see higher interest rates, meaning the 10-year Treasury rising, the bond proxies will once again lag behind and with that, managers' sector positioning will pay off."
Volatility Set to Return
The Cboe Volatility Index, commonly known as the VIX, crashed about 27% last year. With the S&P 500 almost setting records daily on optimism around M&A activity, corporate earnings and tax reform, investors were lulled into thinking stocks only go up.
But that serenity could change in 2018, according to DeSanctis, which would be welcome news for active managers.
"A rise in inflation and [interest] rates could spark higher volatility and this creates a better backdrop for active [managers]," says DeSanctis.
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