May 18, 2018

Will trackers outperform actively managed funds in 2018 ?

Management comment

It was a complicated week for the financial markets which were faced with US 10-year yields steepening to the 3.1% threshold, followed by a further increase in the price of oil, with the Brent index approaching $80, and then a breakdown (albeit temporary) in the negotiations attempting to form a government in Italy. The two front-runners in the Italian elections, namely the 5-star movement and the League, are said to have finally reached a somewhat utopic agreement proposing a blend of tax stimulus and public spending.

This unholy alliance will therefore clearly defy Europe and undermine all of the recently accomplished improvements. For the first time since the crisis, notwithstanding the Greek situation which is a case apart, populist movements have secured power in a European country. Financial reality may ultimately bring all sides to their senses however. The markets are on hold and observing the situation attentively, ready to sell Italian 10-year sovereign BTP bonds at the first sign of blockages or heavy-handed policies.

The geopolitical context has deteriorated both in the Middle East and also in the preparations for the summit between the US and North Korea. Investment flows are turning increasingly towards dollar-denominated assets, which are benefitting most from the new paradigm installed by Donald Trump’s team, i.e. the tax reform coupled with protectionism in favour of US companies. Meanwhile, economic indicators continue to beat forecasts, with the Phil Fed index recently coming-in higher than expected.

Despite these risks and the outflow of capital, the major European indices held up relatively well. This resilience has been the most surprising factor during the first part of the year. Without the contribution from oil stocks however, many fund managers are struggling to perform in-line with the indices.

Will 2018 be a year of revenge for the index trackers? Although this may be the case temporarily, actively-managed funds remain the appropriate response to ensure efficient allocation over the long term and particularly during periods of incertitude.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 18th, 2018.

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It was a complicated week for the financial markets which were faced with US 10-year yields steepening to the 3.1% threshold, followed by a further increase in the price of oil, with the Brent index approaching $80, and then a breakdown (albeit temporary) in the negotiations attempting to form a government in Italy. The two front-runners in the...
2018-05-18