A group of investors once thought to be at risk of extinction now looks more prepared than anyone else to fight off a trade war
- An escalating global trade war stoked by the actions of the Trump administration has been largely responsible for stock market volatility in recent weeks.
- A group of investors once left for dead is surprisingly well-positioned to withstand mounting trade war pressures, according to Bank of America Merrill Lynch.
As President Donald Trump prepares to ratchet up the stakes of a mounting global trade war, one group of investors is well-positioned to withstand the fallout.
That would be active managers, or traders who make their bona fides analyzing the fundamentals of companies and selecting stocks accordingly. Once left for dead amid the rise of robo-advisors and passive strategies, stock-picking enjoyed a renaissance of sorts in 2017, and now looks well-hedged against trade war pressures.
Large-cap active funds are far less exposed to China-specific trade war risk than the benchmark S&P 500 across multiple categories, according to data compiled by Bank of America Merrill Lynch and reflected in the chart below.
"Although active funds' foreign exposure is roughly in-line with the S&P 500 benchmark, they do have significantly lower exposure to the stocks that appear more vulnerable to a potential trade war, particularly one with China," Savita Subramanian, BAML's chief US equity and quant strategist, wrote in a client note.
Focusing on trade war exposure is especially important right now, considering the Trump administration's plans this week to unveil the list of Chinese imports targeted for US tariffs. The list of $50-60 billion worth of annual imports is expected to target "largely high-technology" products.
Considering that up until this point, the market has reacted negatively to any escalation of a so-called trade war - regardless of which side has raised the stakes - investors should be braced for the worst. And with their significantly lower overseas and China exposure, active managers are sitting relatively pretty.
What's more, BAML points out that the relative weight in energy is the highest since June 2017 for active managers, while their weight in materials is the highest since October 2017. Both positions are "likely to provide a hedge against potential inflation," said Subramanian.
With all of this in mind, it's important to note that active managers won't be completely insulated. If the market goes haywire, they'll take a hit just like everyone else.
But many of the quantitative and passive strategies that have been groomed to take over equity investment haven't been tested in a down market - so the degree to which active managers can stay afloat could be their ultimate saving grace.