The outgoing leader of one of the largest active US fund managers warned that investors should “stay away from risk” in order to avoid burning in the increasingly speculative market.
Investors should not be overly exposed to what has worked in the past or three years, said Bill Stromberg, CEO of T Rowe Price, which will retire later this year. “Even if it’s a year too early. Because when the market relaxes, the risk areas will relax the most. ”
Markets were strong in 2021, recovering quickly from the pandemic shock as government stimulus inflows, loose monetary policy and strong consumer demand brought stock indices to peaks of all time. Investors have taken on more risk.
“There has been a lot of above-average speculation over the last two years,” Stromberg warned in an interview with the Financial Times. “We were in a cycle where there was a lot of free risk-taking.”
The widely monitored indices are supported by a small number of extremely large, overvalued companies, Stromberg said, while much of the rest of the market has been “taken over”.
This concentration means that active management is more valuable, Stromberg said. “It’s time to move away from the most speculative investments – things that have very high values with no income to support it.”
“Investors should remain disciplined,” he said. “I can’t tell you when that period of speculation will end, but it won’t last.”
Investors must look for active managers who are “willing to step away from risk” so they don’t get burned, he said.
Actively managed stock companies like T Rowe have been hit for the past 10 years as the bull market and cheap index-tracking products have made it easier for small investors to outperform active managers for a fraction of the cost.
According to Morningstar Direct, less than half of all active funds surpassed passive indexed funds such as the S&P 500 stock index for the year to June 2021. In the long run, the record is more uneven, with less than 20 percent of all active funds surviving survivors on average were better over a period of 10 years.
T Rowe managed to survive in a changed landscape. The company gained a name by choosing stocks in Silicon Valley such as Twitter and Uber before their initial public offering, along with newer brands such as eyewear supplier Warby Parker.
T Rowe’s share price has risen more than 150 percent over five years, while its assets under management have roughly doubled since 2016. The stock company outperformed the S&P 500 but had a worse result than the Nasdaq Composite, which is up for about 200 percent.
Stromberg has been at T Rowe for 34 years and has been the CEO for five years. The fund company manages $ 1.6 trillion.
The value of active management, Stromberg said, “comes down to who can deliver and win passively in the long run. We are one of half a dozen big companies that have done well over time. ”
Stromberg also led the company through its first major acquisition acquisition Oak Hill Advisors for $ 4.2 billion, an alternative investment manager with problematic, special situations, structured credit strategies and real estate strategies, among others. The deal will diversify T Rowe’s revenue stream.
As the sector becomes more consolidated and competitive, large companies turning to acquisitions for growth is a topic that will continue, Stromberg said. “I see no reason why that trend should change.”
Stromberg will be succeeded at T Rowe by Rob Sharps, a 24-year veteran of the company, who currently serves as chief investment officer.