Time to be contrarian

While there won’t be much of a pick-up in U.S. growth in the near future, the American economy is not falling apart, according to Paul Quinsee, chief investment officer at JP Morgan Asset Management.

Speaking at the Investment Management Consultants Association’s (IMCA) New York Consultants Conference earlier this week, he asked the question that dominated the conference: “Why not invest in U.S. equities?”

Read: Be greedy when others are fearful

Acknowledging that the market remains fraught with risk, he pointed out that the U.S. is in better shape than much of the developed world.

“We are in a period of economic growth that’s a lot less than the 1980s and 1990s, and it’s likely that will continue,” he pointed out. “[However], experience in the U.S. is looking better than the rest of the world. Europe is in a recession, but our economy is starting to outperform.”

Quinsee’s says U.S. investors should seriously consider returning to the equity market. By continuing to chase low-volatility assets and avoiding risk, they are missing out on countless opportunities. And how should they react to the fact that everyone seems to be pulling out of U.S. equities?

“The opportunity is to be contrarian and invest in U.S. equities,” said Quinsee, “Things aren’t perfect, but given the strength of American companies, and the starting prices, there’s nowhere better to be. People are going to realize they’re missing one of the best investments and try to get back in.”

The fear that hangs over the U.S. market was on clear display in 2011, as the S&P 500 posted a daily change of more than 2% on 68 trading sessions. By way of comparison, 2005 saw only two days with such wild swings.

“It’s unrealistic to expect this to continue,” he said. “Try not to be a victim of volatility.”

The unprecedented level of correlation between stocks has made it extremely difficult to succeed as a stock picker, he said, but this too will come to an end. Quinsee believes that investors will soon come to their senses and face reality, resulting in a calmer market with lower correlation.

While many point to high frequency trading as a problem in the market, he said there is no evidence that it leads to higher volatility; in fact, he says the relationship is the reverse.

“There are some technical areas that justify regulatory scrutiny, but the game hasn’t changed,” said Quinsee. “Volatility causes more trading, not the other way around. Same applies to ETFs.”

A major weak area for U.S. investors has been their reluctance to actively manage their portfolios. Quinsee admits that less than 20% of active managers beat the index net of fees last year, but also pointed out that many traditional valuation measures just didn’t work last year because investors bet on the hopeful prediction that the market would improve.

Investors would be better served by focusing on the premium earned by good active management; he estimates that premium to be about 1% to 2%, which has a huge impact on the bottom line when the standard return is 8%.

For more of the IMCA New York Consultants Conference, read Melissa Shin’s blog of the event.