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To weather volatile markets, advisors seek active management strategies, but they might not realize the full effects of those strategies if they change tack too soon.

Canadian investment professionals allocate 76% of total assets under management to active management, reveals a survey by MFS Investment Management, with 60% saying active management has superior risk-management controls compared to passive investment options. That perception’s important, because 80% of Canadian investment professionals are at least somewhat concerned about a major drop in equity markets over the next year.

Read: Asset allocation vs. security selection — which wins?

Yet there’s no corresponding drop in return expectations from firms and clients. And that’s where advisors can get antsy.

Performance pressure

Nearly 60% of Canadian survey respondents say their organization expects them to generate positive returns over either one or three years. This performance pressure leads 65% of respondents to replace active managers after three years of underperformance — despite recognizing that a market cycle lasts five years or more (88%), and a longer investment period provides a better foundation to distinguish skill from luck (79%).

Investment professionals “aren’t willing to wait out short-term performance issues,” says Brad Hicks, managing director of relationship management for MFS in Canada, in a release. “In effect, [they’re] buying high and selling low, and they’re destroying value in the process.”

Read: Seeking lower risk? Try twice the diversification

Survey respondents agree that returns will be historically lower in the foreseeable future, as the economy faces slow growth and volatility. So it’s no surprise that 76% of Canadian respondents (and 84% of all respondents) say a strong risk-management process is one of the most important factors they consider when selecting an active manager.

“If market returns are […] suppressed in the medium to long term as the global economy struggles to reignite growth, the excess return potential of active managers will become more compelling,” notes Hicks. “We believe that, to be successful, [investment professionals] need to stop reacting to headlines, put their short-term pressures aside and give their managers the time they need to demonstrate their value over the long term.”

The survey includes responses from 500 advisors, 220 institutional investors and 125 professional buyers worldwide, including 50 Canadian institutional investors and 15 Canadian professional buyers.

Also read: Can 10 million monkeys outperform the index?

Originally published on Advisor.ca
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