Active asset managers need to spend a lot of resources on research if they want to beat passive strategies. But it is nevertheless possible, Pascal R. Bersier writes in his exclusive essay for finews.first.
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Active investment strategies in highly liquid and efficient markets have a hard time, studies regularly show. It would be impossible to beat the total market return in the long run with active investment instruments if you follow the doctrine of the capital asset-pricing-model (CAPM).
This school of thought applies to large caps in the Swiss Market Index (SMI), not least because abovementioned points about liquidity and efficiency hold true and as almost no active manager beat his passive rivals in the past.
«Qualitative factors have to be taken into account to help sort the wheat from the chaff»
The SPIVA U.S. Scorecard 2017 of Standard & Poor’s shows that there are nonetheless ways to exploit anomalies of partially efficient markets with less available information. The study sheds positive light on active fund managers of American small- and mid-caps, of which 53 percent and 56 percent respectively beat their passive opponents last year.
The focus on small- and medium-sized companies is based on the idea that firms with a narrow market capitalization on average generate a better return than companies with a large market cap. To make the small-cap strategy work in the long run however you have to fundamentally analyze the quality of the company in respect to profitability, dividend policy and earnings growth. Qualitative factors such as management and operational risks also have to be taken into account to help sort the wheat from the chaff and to engender a long-term advantage of yield.
«Many financial analysts shy away from conducting lots of research»
The same phenomenon as the one seen with the small-cap-effect can be observed in the Swiss equity market. It is less prevalent in industries that cater for basic needs or where effects of scale generate a competitive advantage. The latter industries have always been dominated by large caps. The small- and medium-sized companies often are active in secondary industries, have a long-term core ownership and achieve a higher profit growth.
To find the pearls with «hidden» ideas in general requires a lot of research, something that financial analysts shy away from. But there are still banks and asset managers who have solutions ready in this segment, with funds and mandates for their clients. In short: to create an added value requires a clean analysis, on which you can construct a strategy.
Pascal R. Bersier founded the company Brevalia in Zurich in September 2015. He used to be a relationship manager at Notenstein Privatbank. He also worked for UBS, Clariden Leu and Credit Suisse. The financial market expert, 37, has a Master degree in Bank Management from University of Lucerne.
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