The Changing Landscape of Investing in the U.S.

by Warren Seah

Passive investing has witnessed a surge in popularity, surpassing active investing in the U.S. However, this trend may undergo a transformation soon, suggests Jill Carey Hall, U.S. equity strategist at BofA Global Research.

According to data from BofA Global Research, the assets managed by passive funds have now exceeded those overseen by active funds. In 2009, active funds were responsible for 80% of the assets under management in the U.S., but currently, their share has dwindled to just 47%.

Active investing entails regular buying and selling of stocks or other investments, whereas passive investing revolves around the buy-and-hold strategy, minimizing the frequency of transactions. One prevalent form of passive investing is index investing, wherein investors allocate their funds to track a broad market index like the S&P 500 SPX.

Over the past few years, capital has been steadily flowing out of active funds and into passive funds. This shift can be attributed, in part, to the underwhelming performance of certain active funds. Furthermore, passive funds generally offer lower fees compared to their actively managed counterparts.

Nonetheless, Jill Carey Hall believes that the outflow of funds from active to passive strategies might now be approaching a tipping point. Recent data from BofA indicates a deceleration in this trend.

Interestingly, BofA Securities clients are now displaying an inclination towards purchasing individual stocks rather than exchange-traded funds (ETFs). Carey Hall attributes this shift to the emergence of platforms such as Robinhood and the hype surrounding meme stocks in recent years. These factors have attracted a new generation of stock pickers.

In the current market climate, stock valuations are soaring, while major indexes exhibit significant dispersion. This implies that stocks do not necessarily move in tandem. According to Carey Hall, “Indexes consist of both undervalued and overvalued stocks, making it a conducive environment for stock picking.”

Expanding Market Leadership in 2024

While the stock market experienced significant growth last year, driven primarily by a few large-cap tech stocks, Carey Hall, an expert in the field, anticipates a broader market leadership in the coming year. According to her, when more stocks participate in the rally, the chances of selecting a high-performing stock also increase.

The Magnificent Few?

Small-Cap Stocks: A Rough Start with Potential

Additionally, Carey Hall and her team forecast an increase in market volatility this year, which can be beneficial for those involved in stock picking.

Strategic Stock Selection

To navigate the potential risks associated with cap-weighted indexes, Carey Hall, alongside a group of BofA strategists, cautions investors. They highlight that while the S&P 500 is heavily concentrated in expensive mega-cap stocks, the Russell 2000 RUT, which focuses on small-cap equities, boasts a remarkable number of non-earners.

Carey Hall proposes focusing on stocks that demonstrate characteristics akin to traditional equity, rather than relying solely on market trends. She identifies certain sectors where stocks tend to behave differently, exhibiting lower correlation and wider performance spreads. On the flip side, there are sectors more heavily influenced by macroeconomic factors, causing stocks within those sectors to move similarly.

Uncovering Opportunities

For instance, Carey Hall suggests that the healthcare sector displays less correlation and greater dispersion among stocks, making it an intriguing area for investment. Conversely, energy stocks often show high correlation due to their reliance on oil prices.

Furthermore, investors may want to consider high dividend-paying stocks according to Carey Hall’s advice. In an environment where short-term interest rates are at their peak, she believes that stocks offering attractive dividend yields above cash yields become particularly enticing.

In summary, Carey Hall predicts an expansion in market leadership for the year, encouraging investors to venture beyond the limited selection of mega-cap tech stocks. She recommends focusing on sectors with distinct stock behavior and considering high dividend-paying stocks in certain market conditions.

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