7 Reasons to Choose Active Now
While index investments have their place, it’s important to recognize what actively managed strategies can do for investors – especially in the current environment, where the risks embedded in passive strategies loom large.
Where and how to allocate across active strategies is a decision where an investor’s specific needs and expectations are critical. Rather than succumb to stereotypes about the merits of active vs. passive, it’s important to take a nuanced view that recognizes the huge range of active strategies available as well as the market conditions that favor active now.
Past performance is no guarantee of future results. All investments involve risk, including possible loss of principal.
Outperformance does not imply positive results. Active Management does not ensure gains or protect against market declines.
This material is only for distribution in those countries and to those recipients listed. Please refer to the disclosure information on the final page.
7 REASONS TO
CHOOSE ACTIVE NOW
Some sectors are naturally suited to active
. In specialized
markets, where information is harder to come by — think
small-cap stocks, emerging markets stocks, global high yield
— active managers can add value by using their expertise
to identify securities that are underpriced relative to
their fundamentals.
Active can preserve as well as grow assets
. After fees, a passive
index strategy will gain all that its benchmark gains — but
also lose everything its benchmark loses. In contrast, active
strategies have the option to adjust holdings in response to
adverse conditions; indeed, the alpha generated by an active
strategy can be traced to “downside capture” as much as gains
from well-chosen securities. At a time when valuations in
many stock and bond sectors are historically high, and when
rates may be poised to rise, active’s flexibility offers a measure
of prudence as well as potential gains.
It’s an uncertain world; can you afford not to use both
approaches
? Market surprises in 2016 underlined the difficulty
in predicting what’s coming next. The long run of gains
since the financial crisis that buoyed passive strategies may
not necessarily be the arc of the future. A recent analysis
by eVestment Alliance of passive and active large-cap stock
returns from 1985 to 2015 showed a cyclical pattern in the
performance of the two approaches over the last 30 years;
however, recognizing that a pattern may exist doesn’t mean
one can anticipate the start and end of a new phase —
meaning it’s wise to hold both types of investments.
Investors deserve to have choices
. Accepting the ups and
downs of active investing is not simply a financial issue. It’s
also one of temperament. Some people would rather take a
chance on outperformance than settle for the mediocrity
of an index return, accepting the risks of underperformance.
As such, the issue is the type of risk one wants to accept in
one’s portfolio — as well as the preferred level of volatility.
IN THE U.S. – INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUAR ANTEE • MAY LOSE VALUE
Legg Mason
Thought Leadership
™
While index investments have their place, it’s
important to recognize what actively managed
strategies can do for investors — especially in the
current environment, where the risks embedded
in passive strategies loom large.
Industry averages don’t tell the whole story
. Statistics about
the performance of active funds overall have reached differing
conclusions through the years. But what matters to investors
is the performance of the active funds they actually own —
which can vary greatly. The key for investors is to focus on
managers whose approach is truly distinct from the indexes
— and be wary of so-called “index huggers” which are not
different enough to truly outperform.
Investor needs may demand outperformance
. Many investors
have aggressive goals and/or imminent priorities that may only
be realized with returns greater than passive strategies can
provide. In many cases, the outperformance possible through
active strategies may be the only way to meet these goals
without formally reallocating money into higher-risk sectors.
Indexes may pose real risks
. Indexes are not averages of the
whole universe of securities in an asset class. Instead, they
are models constructed around assumptions — many of
them arbitrary — about what to include and how to weight
it. Unfortunately, over time, those assumptions can introduce
unanticipated risks. Example: the huge increase in Treasuries
as a component of the popular Bloomberg Barclays US
Aggregate Bond Index that’s taken place since the financial
crisis exposes passive investors to unwanted duration and
interest-rate risk. Another example: the concentration risk
inherent in a cap-weighted index like the S&P 500, with
the top 10 stocks accounting for over 18% of its value. But
do those stocks represent the best chance for future gains?
*
As of December 31, 2016.
© 2017 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.
687167 MIPX336056 1/17
IMPORTANT INFORMATION:
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally
invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic
developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss
of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit,
inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties,
which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not
be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index.
Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or
performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or
sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments
and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but
the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason
or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular
investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg
Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any
use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from
Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material
should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control
and ownership by Legg Mason, Inc. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
ALL INVESTORS IN THE UK, PROFESSIONAL CLIENTS AND ELIGIBLE COUNTERPARTIES IN EU AND EEA COUNTRIES EX UK AND QUALIFIED
INVESTORS IN SWITZERLAND:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England
and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.
ALL INVESTORS IN HONG KONG AND SINGAPORE:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte.
Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
ALL INVESTORS IN THE PEOPLE’S REPUBLIC OF CHINA (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is
only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking
Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/
or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII
Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
DISTRIBUTORS AND EXISTING INVESTORS IN KOREA AND DISTRIBUTORS IN TAIWAN:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments
(Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei
110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
ALL INVESTORS IN THE AMERICAS:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International.
Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
ALL INVESTORS IN AUSTRALIA:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents
are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered.
It is not to be reproduced or distributed to any other person except to the client’s professional advisers.
Legg Mason is a leading global
investment company committed
to helping clients reach their financial
goals through long term, actively
managed investment strategies.
• Over $710 billion* in assets
invested worldwide in a broad
mix of equities, fixed income,
alternatives and cash strategies
• A diverse family of specialized
investment managers, each
with its own independent
approach to research and analysis
• Over a century of experience
in identifying opportunities and
delivering astute investment
solutions to clients
Brandywine Global
Clarion Partners
ClearBridge Investments
EnTrustPermal
Martin Currie
QS Investors
RARE Infrastructure
Royce & Associates
Western Asset
leggmason.com
More from Legg Mason Global Asset Management
The most important insight of the day
Get the Harvest Daily Digest newsletter.
