Beginners Series Webinar - Join us on Friday, July 17th, at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Understanding the Asset Class Group Scores Page. Register here. 

Mid -Year Market Review - Join the Nasdaq Dorsey Wright team as we discuss the volatile market movement through the first six months of the year and what to monitor in the second half of 2020. Click here to register.

Speakers include:

• Jay Gragnani, Head of Research and Client Engagement
• John Lewis, CMT, Senior Portfolio Manager
• Jamie West, CFA, Senior Analyst
• Chuck Fuller, Senior Vice President, Applied Research

Models Workshop - The Investment Models Workshop is designed specifically for financial professionals looking to incorporate Nasdaq Dorsey Wright's (NDW) turnkey model solutions into their investment practice, as well as those who would just like to learn more. This three-hour virtual course will not only give you the chance to engage with experts from NDW, but will also expose you to new strategies, investment frameworks, and best practices for utilizing the NDW Research Platform to help you manage your business with more confidence, efficiency, and greater scale. Investments & Wealth Institute® has accepted the Nasdaq Dorsey Wright Investment Models Workshop for 3 hours of CE credit towards the CIMA®, CPWA®, CIMC®, and RMA certifications. Click here for more information.

Market Update Webinar Replay - Missed Monday's webcast? Click the link(s) below for a recap:

Video Replay
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As highlighted in yesterday’s Were You Aware and Weekly DALI and US Equity Overview, a number of bullish percent indicators have experienced changes, indicating new levels of participation from individual equities across the various universes. Despite lowering levels witnessed across the tech-heavy Nasdaq 100 NDX, we find generally increased levels of participation from other major equity universes like the S&P 500 SPX, S&P 400 MID, as well as the S&P 600 SML.

Building off yesterday’s Weekly DALI and US Equity Overview explicitly, although lagging in absolute terms on the year, small caps have picked up steam in recent months, especially the small cap growth camp. The Asset Class Group Scores (ACGS) page further quantifies this finding as the small cap growth group displays the highest score direction of all US Styles at 2.09, its strongest reading in over five years. Interestingly enough, when looking under the hood of the SPDR S&P 600 Small Cap ETF SLY, we notice a majority presence of value oriented names, likely contributing to the abysmal fund score of SLY at 0.90 given the persistent aggregate weakness in small value. Moreover, the average SLY stock has a technical attribute just above 2, below the sought after 3 threshold, further speaking to the refined/narrow leadership in the space. Point being, when it comes to small cap exposure, it is critical to know what you own!

Those looking to monitor the small growth/value story going forward may consider setting group score alerts on the ACGS page, column change notifications on BPSML, or on individual trend charts via Activity Alerts. 

In a prospecting article from May we looked at the relative performance of active and passively-managed funds during the volatile months of March and April, a period that theoretically should have favored active managers. With two quarters of 2020 officially behind us, we thought this would be an opportune time to take a look at the longer-term relative performance of these strategies.  

Proponents of passive management insist that active managers cannot consistently outperform a passive benchmark and therefore investors are better off to invest in lower-cost index funds. Meanwhile, those in the active camp maintain that through their analysis and expertise active managers are able to produce persistent alpha. The question of active vs. passive is often framed with the premise that active or passive is always superior and focuses largely on the U.S. equity market. However, all markets are not the same and so we should examine the merits of each style on a market-by-market basis instead of taking a one-size-fits-all approach.

The active vs. passive question has special implications for you as an advisor. First and foremost, you want to do what’s best for your clients to help them achieve their financial goals. So, if active managers don’t add value, and utilizing passive funds in order to reduce expenses is in the best interest of your clients, then so be it. On the other hand, utilizing only passive funds eliminates one of your value propositions as an advisor – evaluating and selecting the best funds for your clients – and removes any possibility of outperformance. Therefore, today we’ll examine several different markets in order to find out which are the most efficient and which are the least efficient. In order to get an idea of the level of efficiency, we will take a look at rolling five-year return rankings to see how several of the most well-known indices (representing passive management) have performed.

As mentioned above, the active vs. passive debate often examines only large cap U.S. equities, which is a natural starting point for the discussion – the large cap U.S. equity market is composed of the most well-known companies in the world and represents a large portion of many retirement portfolios. However, if we stop there we ignore what should be an obvious and fundamental element of the discussion – the various markets around the globe are unlikely to all be equally efficient. The very fact that U.S. large cap companies are the most visible and researched firms in the world suggests that the U.S. large cap equity market is likely to be more efficient than its less-well-known counterparts!

In addition to variation across markets, individual markets can also have different characteristics in distinct time periods. During the 10-year bull market from 2009 – 2019 active managers, especially in the U.S. large cap space, often struggled to match the performance of their benchmarks. There have been other periods in the past during which active management has underperformed passive for several years only to have the trend reverse. We cannot rule out the possibility that there have been fundamental changes to the U.S. large cap equity market which will prevent active managers from regaining superiority. However, we also cannot dismiss the possibility that over the last several years we’ve simply been in a market environment that favored passive strategies and the pendulum will swing back in favor of active.

The passive US indices (the S&P 500 SPX and the Russell 2000 RUT) have performed well on an absolute basis with both posting positive returns across almost all time periods examined. The average active manager has struggled to outperform the S&P 500, as the index did not rank below the second quartile in any of the periods shown. On the other hand, the average active manager has been able to narrowly outperform the Russell 2000 finished squarely below the second quartile all periods except for the most recent two.  While it’s possible for active managers to outperform both indices, a strong case can be made for passive management in the S&P 500. However, active management has continually outperformed the Russell 2000 making a strong case for active management in the small cap space.

Moving on to the non-US equity rankings, we see that both the developed and emerging market indices rank in the bottom half of their respective universes in almost every period observed. This tells us that the average active manager in these markets has outperformed the index, adding value for their clients, and indicates that active strategies are likely to be preferable in these markets.

Lastly, US and non-US fixed income active managers have continuously outperformed the indices, especially within the US fixed income space. Similar to the non-US equity indices, active managers have persistently added value for their clients, and active management is likely preferable within the domestic and global fixed income markets.

So, as to which is ultimately better - active or passive - the correct answer seems to be, it depends on the market. As we’ve seen, there are several markets in which the average active manager has usually been able to outperform the index. We’ve also seen there are more efficient markets in which active managers have struggled to outperform the index. Making a market-by-market assessment when deciding whether to employ an active or passive strategy for your clients will allow you to save them money by utilizing passive strategies in efficient markets and add value by identifying inefficient markets and selecting skilled managers who can generate superior returns.

Strength continues to broaden on the Asset Class Group Scores (ACGS) page, as market action Wednesday led to 40 groups now possessing average scores above the sought after 4.00 level. This equates to almost 30% of the total groups, meant to represent the full investible universe, now scoring in the “blue sky zone,” with a total of 88 groups (65%) showing average scores above 3.00. In looking at those areas at the top of the rankings, we continue to see a diverse list of names demonstrating technical strength, with representatives from domestic equities, international equities, fixed income, and alternative investments such as precious metals all find a place among the ACGS leadership. Recent market action has produced some newcomers to this high field position, with a specific focus on the social responsibility group.

Social responsibility is one of the more interesting equity-focused groups we have on the ACGS system, as it includes names from various asset classes that all meet certain environmental, social, or governance (ESG) criteria. The group has seen some major movement thus far through 2020, reaching a previous high of 3.99 on February 6^th before showing drastic score deterioration in its descent to a near-term low of 3.02 on April 3^rd. While social responsibility funds were not strangers to the March drawdowns that were felt across almost all equity markets, the group did hold a favorable position with a fund score north of 3.00 throughout the market turbulence. After moving sideways in score for April and much of May, the group began to move swiftly higher to most recently cross above the 4.00 score threshold for the first time ever following market action on Wednesday. Furthering this improvement, social responsibility also carries a positive average score direction of 1.22, benefiting the strong technical picture. Those looking for potential ideas within this space can use the “Ideas” link to the left of the group name in the ACGS page.

In addition to the multitude of social responsibility ideas available on the ACGS rankings, we also have the FSM ESG100 Sustainable All Asset Rotation 5S PR4050 model available for those seeking a more objective, rules-based way to play the space. This model looks at an inventory of 100 ESG ETFs and mutual funds following the typical five-holding FSM approach, which is evaluated at the beginning of each seasonal quarter. The strategy also utilizes the PR4050 trigger to cash, which allows it to become defensive should the need arise. In following the five-holding FSM approach, the model will seek to hold the top five scoring funds in its inventory at the time of each model evaluation, which we last saw in early-May. While the model could potentially invest in “risk-off” areas of ESG-related fixed income, the most recent model evaluation led to full exposure towards US equity positions. The portfolio is currently overweight technology, consumer cyclicals, and healthcare, which matches up well with the highest-ranked sector groups on the ACGS page. These holdings have produced a year-to-date return of 7.18%, which bests its benchmark CSIFX by over 350 basis points. Those looking to follow the FSM ESG100 All Asset Rotation strategy may do so by clicking on the “bell” icon under the Actions/Activity column on the models listing page. The next model evaluation will be occurring at the beginning of August.

Daily Option Ideas for July 16, 2020