How Opportunities Change Throughout The Business Cycle

Depending on each moment, it may variate what will be more interesting to use, if active or passive management. This seems to be the debate of recent years in asset management: Active or passive management? Both have strong defenders. However, they do not have to be exclusive. On the contrary, some experts recommend using one or the other depending on the moment of the market and the economic cycle. This is the case of fund manager Fidelity.

The economic cycle starts when the first green shoots emerge between the debris of a slowdown or recession. These first days of optimism are usually accompanied by a strong stock market recovery when investors return en masse to the market. Risk assets, such as high yield debt and equities, are back in demand, while consumer-related issues, such as the information technology, industry and financial services sectors, tend to do well.

At that time of the cycle, some quotes suffer more than others when the markets become difficult, which means that "in the first phase of a recovery it is fertile ground for the active managers", explains Fidelity experts. "In this environment, value-style managers tend to emphasize, since they focus on finding companies with fundamental solids that are not reflected in the prices, and after a slowdown, these companies generally abound." After the recovery phase, economic growth accelerates, driven by the expansive monetary policy. Markets tend to follow, driven by good times and liquidity. In a context of generalized confidence in the economic situation, in Fidelity's experts opinion, assets generally show a high correlation and low volatility and dispersion, "conditions in the that passive strategies have historically stood out ". With attractive and constant returns at lower costs "investors are less likely to allocate money to more expensive profitability strategies, since the differences between the two are greatly reduced," they explain from the manager. However, some active strategies you can keep moving forward in this market moment.

Fidelity experts cite active growth-oriented managers, as they focus on companies with solid and quantifiable plans to capitalize on economic strength; Also strategies based on income and dividends can be interesting, especially in low interest rate environments. In addition, active management strategies are useful at this point in the cycle to set up a diversified portfolio, since there are some strategies that are not accessible with a passive approach. Among these assets, Fidelity cites high yield bonds, emerging market debt and inflation-linked bonds. In addition, indexed fixed-income funds are usually weighted by the market value of bonds in circulation, which results in greater damage to the most indebted issuers.