As Markets Rise, Advisor Concerns Switch to Downside Risk

No surprise, Fidelity advocates for active management

401k, active management, Fidelity, marketsWhat happens now?

Sequence-of-return and the danger of retiring in (or into) a down-market are well-documented, something of which advisors are aware, but what about participants?

Topics like the government/economy and portfolio management remained the top two areas of focus in a second quarter survey from Fidelity, yet financial advisors are increasingly concerned about volatility and equity market levels (ranked No. 3 and No. 4 respectively).

Interest rates were also an area of interest (and confusion), having ranked No. 3 the previous quarter but dropping to No. 9 in the current survey, despite the current rising rate environment and advisors’ focus on downside risk.

“With the stock market near record levels, advisors have become increasingly focused on making sure their clients’ portfolios are well diversified across the different asset classes, whether it’s equity or fixed income,” Robert Litle, head of Intermediary Sales with Fidelity Institutional Asset Management, said in a statement. “In this environment, we are seeing greater attention among advisors to protecting clients from any downside risk.”

Boston-based Fidelity argued that interest rates should remain top-of-mind for advisors, given the Federal Reserve’s forecasts for a gradual increase.

“Advisors can support their clients through this period by considering the potential value that active management may deliver,” Fidelity wrote. “Actively managed U.S. large-cap funds have tended to outperform in months when interest rates were rising and tended to underperform when rates were falling or flat.”

One reason could be that the average actively managed U.S. large-cap fund has historically held relatively more mid-cap exposure than its benchmark index.

Over the past few decades, mid-cap stocks (capitalizations of tens of billions down to $1billion or $2 billion) have had a higher dispersion of returns than mega-caps (capitalizations of hundreds of billions).

Higher dispersion in a group of stocks, which measures the difference of all the individual stock returns from the overall index, suggests potentially greater opportunities for active managers to leverage their stock selection skills, buy winners, avoid losers and thus earn higher excess returns.

Historically, mid-cap companies have outperformed the overall index during periods of rising rates. Therefore, the changing interest rate environment could potentially benefit active managers who may identify mid-cap winners and losers, the company notes.

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