The outgoing head of one of America’s largest active fund managers warned that investors should “stay away from risk” to avoid getting battered in an increasingly speculative market.
“Even if they are a year too early,” said Bill Stromberg, chief executive officer of T Rowe Price, who will retire later this year. Because when the market reverses, it will be the most reversible risk areas.”
The market performed strongly in 2021, recovering quickly from the shock of the pandemic as government stimulus flows, easing monetary policy and strong consumer demand boosted stock indexes. all-time high. Investors have taken on more risk.
Stromberg warned in an interview with the Financial Times over the past two years. “We are in a cycle where there is very liberal risk taking.”
The widely watched indexes are being supported by a handful of extremely large, overvalued companies, while much of the rest of the market is “selected,” Stromberg said.
This focus means active management is more valuable, says Stromberg. “It’s time to manage away from speculative investments – very high-value ones with no revenue to back them up.”
“Investors should stay disciplined,” he said. “I can’t tell you when that speculative period will end, but it won’t be sustained.”
Investors need to look for active managers who are “willing to step away from risk” to avoid scaling, he said.
Actively managed fund companies like T Rowe have been seen as bull markets for over 10 years, and low-cost index-tracking products make it easier for retail investors to outshine managers active management at a fraction of the cost.
According to data from Morningstar Direct, less than half of the funds outperformed passive index-based funds like the S&P 500 stock index in the year to June 2021. Long-term, this profile even more patchy, with less than 20% of all active funds surviving, although surviving funds have performed better than average over the 10-year period.
T Rowe has managed to survive the changing landscape. The company has made a name for itself picking up Silicon Valley stocks like Twitter and Uber before its initial public offering, along with newer consumer brands like eyeglasses supplier Warby Parker.
T Rowe’s stock price has risen more than 150% in five years, while assets under management have nearly doubled since 2016. The fund has outperformed the S&P 500 index but underperformed. Nasdaq Composite over the same period, ie up about 200 percent.
Stromberg has been with T Rowe for 34 years and served as chief executive officer for 5 years. The fund company manages $1.6 billion.
The value of active management, Stromberg says, “focuses on who can deliver and beat passivity in the long run. We are one of half a dozen companies of this size that have done well in the past. ”
Stromberg also led the company through its first major acquisition by buying Oak Hill Advisors for $4.2 billion, an alternative investment manager with distress situations, in particular, structured credit and real asset strategies, among others. The deal will diversify T Rowe’s revenue streams.
As the sector becomes more consolidated and competitive, large companies turning to acquisitions for growth is a theme that will continue, Stromberg said. “I can’t understand why that trend has changed.”
Stromberg will be succeeded at T Rowe by Rob Sharps, a 24-year veteran of the company who currently serves as chief investment officer.