Building a Better Portfolio
This paper examines how liquidity measurement and cash flow management is integrated into a multi-asset, multi-period portfolio construction process.
Since the financial crisis, investors have enjoyed generally benign conditions, with subdued volatility and strong markets - but active equity managers have remained under pressure. Yet this should not be surprising; history has shown a strong pattern of counter-cyclicality in manager excess returns relative to the equity market.
In this study, we take a close look at the relationship between equity market conditions (defined by market returns, volatility, and dispersion) and active equity manager results. Focusing on the US large cap space, we analyze over twenty years of manager and market data to determine which set of conditions are associated with more or less favorable results for active equity managers. Our key conclusions:
Our objective is to provide investors with a better understanding of the relative importance of changing market conditions and the need to bear in mind that they can, and do, shift. There is a market for passive and active management, not one versus the other. PGIM’s focus is on helping long-term investors understand the dynamics and the fit of active management in their portfolios.