Trends Watch: Active Management Opportunities
- Jun 1, 2023
EisnerAmper’ s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Benjamin Nye, Portfolio Manager, Narwhal Capital.
What is your outlook for investing?
We are in a regime where capital is increasingly scarce. This marks a big change from the past decade. The companies that will perform best are those that can manage this scarce resource the best. This contrasts with size being a primary determinant of success over the past decade (i.e., lever up, buy back stock, invest not just in the best projects, but all the projects). The investors that will perform best are those that can allocate investment capital the best. In other words, it sets a favorable backdrop for active management over passive management. In the years between the NASDAQ bubble and the global financial crisis (GFC), active managers actually outperformed the S&P 500 on average, according to Amundi Research. This happened as we rotated from a historically high amount of market cap concentrated in the largest ten companies. I believe we have a similar setup today.
Where do you see the greatest opportunities and why?
In fixed income, there are real returns again. You also have an investing public that generally doesn’t understand fixed income. Years of low interest rates have resulted in an atrophying of these skills. It is difficult to find young bond traders these days, especially on the retail side. On top of that, buyers of debt instruments are under stress. Jamie Dimon wrote in his annual letter that JPMorgan Chase is sticking it out in mortgages, but many banks are getting out of the business. The Federal Reserve is reducing its debt holdings. Private equity and private debt funds may also see their buying capacity reduced over time. This will create opportunities for active managers who can identify those instruments where the natural buyer has exited the market. In equities, I am very optimistic longer-term on the U.S. While some lament the retirement of the baby boomers, I am optimistic about the growth of the millennial generation (the largest generation in history) and what that means for new household formation and spending as they enter the prime working years. I would love to see the growth that we saw in the 1990s when the Baby Boomer generation was thriving. However, in the near-term we need to navigate scarce capital. That means a focus on cash flow, strong balance sheets and good capital allocation.
What are the greatest challenges you face and why?
As noted above, while I am optimistic on the long-term, I must balance that optimism with the short-term realities of the markets. Keeping the long-term in perspective while managing risk in the short-term is difficult, sort of like patting your head and rubbing your belly. They don’t have to be mutually exclusive, but sometimes it is easy to see yourself tilt one way or the other. I also find it challenging to balance conviction with risk management. Sometimes you find a great investment opportunity, but you need to balance that with a healthy humility.
What keeps you up at night?
In the short-term, I am concerned about the decline in money supply. I am most concerned that the Federal Reserve doesn’t appear to understand that this is happening and that it is a contributing factor to the current issues we have in the banking system. I have spoken with former officials who have told me that they’ve never discussed the money supply at their meetings. To me, that seems like an oversight that could have serious negative unintended consequences. Over the long-term, I am concerned that the American Dream is dying. We have a new generation of people who are entering the workforce or who’ve been in the workforce for a decade who are at risk of becoming disillusioned by the GFC, the COVID-19 pandemic and many things in between. If we can face up to these challenges, I think we will emerge stronger than ever. But if we don’t then we run the risk of apathy and disillusionment, which would significantly impair our long-term economic growth potential.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.
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Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.
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