Evaluating the Impact of Active Management, International Investing, and Dividends

Active Management in Volatile Markets

Active investment management shifts into overdrive during periods of heightened volatility when the active news cycle raises concerns for investors. Unlike passive strategies that track indices, active management allows portfolio managers to make informed decisions based on real-time insights from the market. This flexibility is crucial when navigating macroeconomic factors, such as tariffs and government policies, that can significantly impact corporate performance. Low valuations, dividend yields, and stable growth can help mitigate volatility (as shown below).

For instance, going into this new presidency, active portfolio managers could proactively adjust their strategies to combat the potential impacts of tariffs. This could be done to ensure a lack of exposure to companies that may be exposed to macroeconomic forces and external economic pressures. A bottom-up approach focuses on identifying resilient firms capable of adapting quickly to changing market conditions, rather than relying solely on macro data. Active managers are aware of government policy, but they don’t necessarily need the macro data to make individual security decisions.

The Importance of On-the-Ground Insights

One of the key strengths of active management is its emphasis on fundamental research. Portfolio managers and analysts engage directly with corporate executives and attend industry conferences to gauge market dynamics. This method provides insights that are often timelier or overlooked by those waiting for macroeconomic indicators, which are generally reported after the end of a time period. The ability to pivot quickly in response to material public information is vital for optimizing return and downside protection. Active managers leverage this knowledge to build targeted portfolios that can outperform passive investments, which is essentially a flows-driven market.

Cash on the Sidelines: An Opportunity for Active Managers

The current market environment features approximately $7 trillion in cash sitting on the sidelines, representing one of the highest levels in decades. This situation presents a significant opportunity for active managers to attract capital from investors who may feel they have missed out on market rallies. Especially considering that have most likely begun an interest rate-cutting cycle, where money market rates or yields are starting to decline.

Investors Stashing Near Record Cash Accumulation

Investors are increasingly considering putting their money to work by reallocating funds into international equities, especially as many have remained underweight in this area. With the U.S. equity market trading at a premium compared to international markets, there is potential for substantial returns by diversifying into cheaper, undervalued international stocks.

Relative Valuation Supports Non-U.S. Markets

While U.S. earnings have faced downward revisions, international earnings have remained stable or even improved. This divergence, coupled with a weakening U.S. dollar, enhances the attractiveness of international investments. As currency fluctuations can amplify returns, investors may benefit from both stable earnings and favorable currency movements.

The Case for Dividends

It’s highly unlikely that you would see a dramatic decline in rates without a meaningful decline in economic activity. However, if longer rates drift marginally lower, then dividend-paying stocks could become increasingly appealing. With the potential for interest rates to remain steady, companies that can provide attractive yields through dividends stand to benefit. And even in the event of economic uncertainty, dividend-oriented investments can offer a reliable income stream for investors. Dividend yields are also higher outside of the U.S. as a result of the differences in earnings valuations as well as payout ratios.

Higher Yields Outside of the U.S.

Key Takeaways

Investors should recognize the value of active management in today’s complex market landscape. Active management can be well-positioned to deliver significant benefits to investors by focusing on bottom-up research, capitalizing on valuation disparities, and emphasizing quality companies with growing dividends.