Skip to content
Systematic Active Equity Insight

Time to go active in U.S. equities?

Jul 29, 2019

It’s a new day for active management. Active managers traditionally have relied on a small set of information sourced primarily from companies to make investment decisions. As this information has become increasingly well understood and efficiently priced by stock markets, the result has often been diluted returns to active management.

This, in turn, has caused investors to lose confidence in the ability of active managers to add value, and ultimately driven fund flows to index strategies. But the world is changing – new data and technology are opening new avenues to generate alpha for those active managers with
the skill to use it.
 

Why now?

The arguments against active management in the U.S. have become well known and widely accepted. Some of the common rhetoric: The U.S. market is too efficient, no single manager can gain a consistent information advantage, and the cost of active is too high. Yet in a lower-return world, a purely passive approach that tracks market indexes may fail to fulfill investors’ performance targets. Given the size of the U.S. exposure in global equity portfolios, an ability to consistently generate alpha in the U.S. could be a particular boon for portfolio returns.

Seeking an
information advantage

In decades past, investors largely relied on information supplied by companies themselves to understand how business conditions and fundamentals were evolving. But the digitization of the economy in recent years has led to a step change in the availability of information – particularly in the U.S. Hundreds, if not thousands, of new information-rich data sources are now available. Yet the newfound reams of data are only useful to those with the scale and resources to process and harness them.

BlackRock’s Systematic Active Equity (SAE) team complements traditional sources of information and analytical methods with alternative data and modern data science-led techniques in an effort to better understand businesses and evaluate their performance. The goal: Seek to generate excess returns in equities by having a view that differs from the consensus – and being right.

Gleaning more as
companies say more

Over the years, improvements in financial reporting requirements have led to more frequent and higher-quality regulatory filings, particularly in the U.S. The average U.S.-listed firm is now submitting approximately one financial regulatory filing every three business days. This is roughly twice the pace of filings from just a decade ago, as shown in the More reports chart below. At the same time the quantity of information released is increasing, the quality of that information is improving as well. The median U.S. firm now writes a 7,000-word, or roughly 10-page, description of its business detailing all the various products, divisions and drivers of results. The More words in each chart shows the increase since 2010. Higher-frequency, content-rich filings present an opportunity to extract more information and make better forecasts.

The case for active equities in the U.S.

This is only the tip of the iceberg. We believe the depth, breadth and quality of information now available, when coupled with the appropriate investment insights and technical capabilities, present a new and exciting opportunity for investors who may have turned their back on active management as a core portfolio solution.

Download full report