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UBS House View Weekly 23 October 2017
Deeper dive
Is active investing
ready for a comeback? Mark Haefele
For more than a decade, money has flowed out of actively of 9.2%, compared with a 20-year average of 44%. From
managed funds into passive ones. Active US equity funds 20002016, equity long-short strategies generated aver-
last calendar year of net inflows was 2005. In contrast, ETFs age annual alpha of 6.5% or more when correlation was
are growing rapidly; in the first nine months of 2017, assets lower than the median.
invested in global ETFs rose by almost 25% to reach a new
high of USD 4.3 trillion. Equity ETFs have led the rise; they 2. While S&P 500 stock price dispersion has yet to rise
account for three quarters of the total, and passive funds are much, the dispersion in valuation between the cheap-
the vast majority. est and most expensive stocks is very wide (at the 80th
percentile of the range since 1991). This suggests price
The proportion of equity ETF and mutual fund assets that dispersion could rise a lot if investor focus shifts to valua-
are passively managed has also grown significantly, as well tions creating an attractive environment for long-short
as in absolute terms; rising to 46% from 22% in the US, and managers.
to 35% from 11% in Europe, since 2007. The ETF market is
now more than USD 1trn larger than the entire hedge fund 3. As normalizing interest rates replace loose monetary
industry, and over 10% of the global equity market cap is policy, active managers could see trading opportunities.
now managed passively. Hedge funds typically outperform other asset classes
when rates are rising. In the US, during the past three
Investor preference for passive funds has been supported rate hiking cycles over the last 20 years, equity long-short
by lower costs and risk-on, risk-off equity markets, which hedge funds produced annualized total returns close to
made it difficult for active managers to outperform. Be- 14%, compared with slightly less than 8% for the S&P
tween 2013 and 2016, more than 93% of fund managers 500.
benchmarked against the S&P 500 failed to beat the market.
Over a longer time period, active managers have still strug- These dynamics are already having an effect. Returns to
gled. Less than 15% of US stock fund managers managed to active management appear to be picking up. In 1H 2017,
beat their benchmarks over the past 15 years. 54% of US active managers surpassed their benchmarks.
As of end-September, global equity long-short hedge funds
But while growth in passive investing in recent years is have gained 9.6% year-to-date, their best performance since
understandable, there are reasons why some active manage- 2013. If correlations stay low and price dispersion increases,
ment strategies could outperform indexes in the future: this trend could prove durable.
Bottom line
For more than 10 years, passive investing has gained equity market share at the expense of actively managed funds. In equity
markets driven by swings from risk-on to risk-off, active managers have struggled to outperform and only a small proportion
have beaten their benchmarks. But now, low correlations, wide valuation dispersion, and monetary tightening suggest active
managers may start to outperform.
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Top of the Morning daily podcast Week in Review/Preview with UBS House View Weekly 23 October 2017
Jason Draho, Head of Tactical Asset Allocation Americas
www.ubs.com/topofthemorning
Regional view
Matthew Kevin
DeMichiel Dennean, CFA
Thematic Strategist Technology and
Telecom Equity Sector
Strategist Americas
It may be in a bubble ties. This is because, with blockchain, all
We caution that some cryptocurrencies transactions are automatically reconciled.
may be displaying characteristics similar We estimate that blockchain could add
to past bubbles, such as investor exu- as much as USD 300400bn of global
This year we have seen an explosion of berance and aggressive value apprecia- economic value by 2027. Further, we
investor interest in cryptocurrencies and tion over a short time. In a September believe blockchain as a technology can
their underlying technology blockchain. interview, Nobel laureate Robert Shiller, gain widespread adoption even without
This can be seen, at least in part, from author of Irrational Exuberance, pointed cryptocurrency.
Bitcoins 580% surge in value against the to Bitcoin as the best example of a cur-
US dollar since the start of the year. rent market bubble. Mr. Shiller famously Outlook and implications
warned about market excesses ahead of Going forward, we believe regulatory
These emergent technologies may, in the the dotcom and housing bubbles. action will be important. So far, the SEC
future, be applicable to a wide variety of and the Commodities Futures Trading
industries. We believe blockchain could Bubbles normally occur when the price Commission (CFTC) have maintained a
dramatically reduce the costs and im- of an asset deviates from its fundamen- light touch in an attempt to not stifle
prove the efficiency of transactions, trad- tally-based value. However, prices move innovation. However, if cryptocurrencies
ing and settlement, and general record much more quickly than fundamentals, become further entwined with financial
management, to name a few examples. which can often result in a significant markets, regulators will likely revise their
Although these kinds of applications are disconnect. The fair value of crypto- approach.
in their infancy, expectation has fueled currencies is highly uncertain, given the
the rapid appreciation in some cryptocur- emergent nature of blockchain technolo- We believe investors should remain
rencies value. gy, and with thousands of competing ver- cautious in the short term and fully un-
sions it is unclear which will end up being derstand the risks before investing in any
Anything but boring successful. Further, fundamentally-based cryptocurrency or blockchain technology.
Bitcoin, for example, has enjoyed an models are not always accurate and may For more commentary on cryptocur-
outsized return on investment this year. not explain market pricing. With crypto- rencies and blockchain, see our latest
However, this has not happened without currencies, the fundamental value can publication Beneath the bubble.
significant volatility. In mid-March, Bitcoin be difficult to assess, therefore making
lost over 30% of its value when the Se- it even more challenging to determine if Kind regards,
curities and Exchange Commission (SEC) the market price is reasonable. Matthew DeMichiel and
denied approval of a proposed Bitcoin Kevin Dennean
exchange-traded fund. Bitcoin dropped Blockchain applications
again in September this time by over We do believe that blockchain has ex-
25% after regulators in China banned citing potential. Its decentralized nature
all cryptocurrency exchanges and trading could facilitate greater transparency and
by Chinese citizens. eliminate the need for trusted third par-
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UBS House View Weekly 23 October 2017
Asset classes MTD YTD 2016 US equity sectors Weekly MTD YTD 2016
Equity 1.88 19.45 7.86 Cons. Discr. 0.04 1.17 13.25 5.00
Fixed Income 0.29 6.55 2.09 0.94 0.29 6.88 4.21
Cons. Staples
Cash NA NA NA 0.70 1.11 7.67 27.79
Energy
n + ++ +++
Total return indices in USD, Financials 0.81 1.93 14.65 21.68
underweight neutral overweight
in %
Healthcare 1.70 2.51 23.32 3.56
Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capi-
tal Global Aggregate Index (for Fixed Income), Dow Jones-UBS Commodity Index Total Return Industrials 0.22 1.52 15.86 18.07
Source: UBS, as of 20 October 2017 0.31 3.21 31.45 12.22
Technology
Materials 0.23 2.49 18.70 15.78
Equities MTD YTD 2016 Real Estate 0.69 1.63 9.14 2.56
Tactical deviations from benchmark symbols Past performance is no indication of future performance.
The overweight and underweight recommendations represent tactical deviations that can
+ Moderate overweight vs. benchmark be applied to any appropriate benchmark portfolio allocation. They reflect CIO-A WMs
++ Overweight vs. benchmark assessment of market opportunities and risks in the respective asset classes and market
segments. The benchmark allocation is not specified here. Please see the most recent UBS
+++ Strong overweight vs. benchmark
House View: Investment Strategy Guide for definitions/explanations of benchmark allocati-
n Neutral, i.e. on benchmark on. They should be chosen in line with the risk profile of the investor. Note that the Regional
Moderate underweight vs. benchmark Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the
underlying currency risk of such investments). Thus, the deviations from the benchmark
Underweight vs. benchmark reflect our views of the underlying equity and bond markets in combination with our as-
Strong underweight vs. benchmark sessment of the associated currencies.
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UBS House View Weekly 23 October 2017
USD NA NA NA
Tactical deviations from benchmark symbols Past performance is no indication of future performance.
The overweight and underweight recommendations represent tactical deviations that can
+ Moderate overweight vs. benchmark be applied to any appropriate benchmark portfolio allocation. They reflect CIO-A WMs
++ Overweight vs. benchmark assessment of market opportunities and risks in the respective asset classes and market
segments. The benchmark allocation is not specified here. Please see the most recent UBS
+++ Strong overweight vs. benchmark House View: Investment Strategy Guide for definitions/explanations of benchmark allocati-
n Neutral, i.e. on benchmark on. They should be chosen in line with the risk profile of the investor. Note that the Regional
Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the
Moderate underweight vs. benchmark
underlying currency risk of such investments). Thus, the deviations from the benchmark
Underweight vs. benchmark reflect our views of the underlying equity and bond markets in combination with our as-
Strong underweight vs. benchmark sessment of the associated currencies.
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UBS House View Weekly 23 October 2017
Earnings calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by CIO Americas, WM. Reporting
dates and times are subject to change by the reporting companies.
23-Oct-2017 Halliburton Co. HAL State Street Corp. STT Crane Co. CR
24-Oct-2017 TD Ameritrade Holding Corp. AMTD Caterpillar, Inc. CAT Akamai Technologies, Inc. AKAM
24-Oct-2017 Corning, Inc. GLW General Motors Co. GM Express Scripts Holding Co. ESRX
24-Oct-2017 PulteGroup, Inc. PHM 3M Co. MMM Capital One Financial Corp. COF
24-Oct-2017 Centene Corp. CNC McDonald's Corp. MCD Ameriprise Financial, Inc. AMP
24-Oct-2017 Eli Lilly & Co. LLY Healthcare Trust of America, Inc. HTA Equity Residential EQR
24-Oct-2017 Biogen, Inc. BIIB Juniper Networks, Inc. JNPR Edwards Lifesciences Corp. EW
24-Oct-2017 United Technologies Corp. UTX Nabors Industries Ltd. NBR Baker Hughes, a GE Co. BHGE
24-Oct-2017 Lockheed Martin Corp. LMT Texas Instruments Incorporated TXN Discover Financial Services DFS
25-Oct-2017 Amgen, Inc. AMGN Thermo Fisher Scientific, Inc. TMO Ally Financial, Inc. ALLY
25-Oct-2017 General Dynamics Corp. GD The Coca-Cola Co. KO The Boeing Co. BA
25-Oct-2017 Suncor Energy, Inc. SU International Paper Co. IP Norfolk Southern Corp. NSC
25-Oct-2017 DTE Energy Co. DTE New York Community Bancorp, NYCB Public Storage PSA
Inc.
25-Oct-2017 Visa, Inc. V Walgreens Boots Alliance, Inc. WBA Whiting Petroleum Corp. WLL
25-Oct-2017 Anthem, Inc. ANTM Baxter International, Inc. BAX Mid-America Apartment MAA
Communities, Inc.
26-Oct-2017 EQT Midstream Partners LP EQM American Electric Power Co., Inc. AEP Camden Property Trust CPT
26-Oct-2017 MPLX LP MPLX Bristol-Myers Squibb Co. BMY Fortinet, Inc. FTNT
26-Oct-2017 Marathon Petroleum Corp. MPC ConocoPhillips COP Gilead Sciences, Inc. GILD
26-Oct-2017 Valero Energy Corp. VLO Ford Motor Co. F Alphabet, Inc. GOOGL
26-Oct-2017 Air Products & Chemicals, Inc. APD Altria Group, Inc. MO National Oilwell Varco, Inc. NOV
26-Oct-2017 Comcast Corp. CMCSA Celgene Corp. CELG Intel Corp. INTC
26-Oct-2017 Hilton Worldwide Holdings, Inc. HLT McKesson Corp. MCK Stryker Corp. SYK
26-Oct-2017 Praxair, Inc. PX NextEra Energy, Inc. NEE Amazon.com, Inc. AMZN
26-Oct-2017 Southwest Airlines Co. LUV T. Rowe Price Group, Inc. TROW Microsoft Corp. MSFT
26-Oct-2017 Invesco Ltd. IVZ WEC Energy Group, Inc. WEC Eastman Chemical Co. EMN
26-Oct-2017 Raytheon Co. RTN United Parcel Service, Inc. UPS Apartment Investment & AIV
Management Co.
27-Oct-2017 Phillips 66 Partners LP PSXP Merck & Co., Inc. MRK Chevron Corp. CVX
27-Oct-2017 AbbVie, Inc. ABBV Colgate-Palmolive Co. CL Simon Property Group, Inc. SPG
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UBS House View Weekly 23 October 2017
25-Oct-17 Durable Goods Orders less transportation September 8:30 AM m/m 0.4% 0.5%
26-Oct-17 Jobless Claims For week, October 21 8:30 AM m/m 240k 222k
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UBS House View Weekly 23 October 2017
Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes
in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets
can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO-A WM generally recommends only those securities it believes
have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration
rules (commonly known as Blue Sky laws). Prospective investors should be aware that to the extent permitted under US law, CIO-A WM may
from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where
the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.
For more background on emerging markets generally, see the CIO-A WM Education Notes, Emerging Market Bonds: Understanding Emerging
Market Bonds, 12 August 2009 and Emerging Markets Bonds: Understanding Sovereign Risk, 17 December 2009.
Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in
the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has
defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds
for shorter periods only.
Disclaimer
Research publications from Chief Investment Office Americas, Wealth Management are published by UBS Wealth Management and UBS
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as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment
or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular
investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Dif-
ferent assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications
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