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“US equities have been rallying since the presidential election, driving major equity indexes such as the S&P 500 Index and the Russell 2000 Index to record highs.”
The global financial environment is changing, driven in part by the Fed’s monetary policy moves and the Trump Administration’s potential changes to US fiscal policy. This may create opportunities to exploit inefficiencies – a cornerstone of all actively managed strategies, especially in sectors which might benefit from the pro-growth policies such as healthcare, infrastructure, defence, energy and financials.
Areas that lend themselves to potential outperformance through active management include:
High Active Share U.S. Equities
Funds with high active share are designed to be bolder and take on off-benchmark opportunities and risks. These fund managers typically implement very robust and structured investment processes. They generally have proven track records in building high-conviction, concentrated and low-turnover portfolios.
High active share funds have the potential to deliver higher returns, particularly when markets are volatile or falling. Aside from the alpha these managers deliver, given the historical highs at which US equity markets have been trading, a correction may be inevitable. Passive products have no ability to protect investors when there is a market drawdown.
Small Cap Equities
By size and nature, there are greater inefficiencies within small cap equities. This could offer active managers more opportunities to outperform, given higher levels of insider ownership, which tends to align management and investor interests.
The benefits of active management extend beyond performance. Active managers can screen for quality and use buy/sell triggers to reduce risk, investing only in the most attractive stocks. This is particularly important in small caps, which includes many illiquid, under-followed companies with greater price discrepancies.
Those who invest in the top quartile of actively managed funds can potentially benefit over time. The key is to find managers whose approach is truly distinct from the indexes and have demonstrated longer term expertise.
Active management can provide investors with enhanced capabilities and options that will help them continue to capture alpha, while offering protection from the downturn. Some managers may not beat the benchmark each year, but the best often outperform the market in difficult times. Now may be the time for investors to seek out and trust their portfolios to successful , well-chosen active managers.
To find out more about Legg Mason’s US Equities capabilities, please click on the links below:
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This is a sponsored article from Legg Mason.