Key Insights
- A criticism sometimes levelled at active management is that many strategies struggle to consistently deliver alpha across changing market conditions.
- We consider whether active stock picking, with the flexibility to invest across the full market cap spectrum, can consistently add value over time.
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Importantly, is it possible to deliver on this ambition of consistent added value without also taking on significant additional risk?
One of the truisms of investing is that financial markets are constantly changing, continuously impacted by new information and rapidly evolving dynamics. Indeed, one of the criticisms sometimes levelled at active management is that many strategies struggle to consistently deliver alpha across various market environments. With this in mind, we consider what it means to be a high‑conviction active manager and whether fundamental stock selection across the market capitalization spectrum can consistently deliver alpha generation across varying market and economic conditions.
All‑Cap Remit Provides an Expansive Opportunity Set
Following a bull market run that lasted more than a decade, the US equity market landscape has been much more volatile and uncertain over the past two years. This is where an actively managed all‑cap strategy can be beneficial, providing an expansive opportunity set in which to find quality, well‑managed businesses capable of generating alpha.
Successful navigation of different market environments is exactly what an all‑cap strategy is designed to do, providing the flexibility to invest in companies of any size beyond the well‑known and heavily invested large companies, and across the style spectrum, from high‑growth to deep‑value names. The ability to quickly adapt to new economic cycles and changing market dynamics is central to potentially delivering more consistent performance outcomes over time for investors.
Delivering Alpha Through Various Market Conditions
The T. Rowe Price US All‑Cap Opportunities Equity Strategy aims to deliver on this ambition by generating alpha through various market conditions. The portfolio manager fully utilizes this all‑cap flexibility by applying a unique stock‑picking framework that centres on four key "pillars": business quality, earnings expectations relative to the market, whether company fundamentals are improving or declining, and valuation. Each of these pillars is multifaceted, and rarely do all point in the same direction; rather, they are intended as a flexible framework to ensure that a wide variety of ideas are considered.
The framework is key in filtering the potential universe, and, importantly, it also helps to focus selection decisions on the fundamental truth that stock prices are ultimately a function of supply and demand over the short to medium term. When there are more incremental reasons for investors to want to buy a stock (i.e., it is in higher demand) and fewer incremental reasons to sell (i.e., supply it back to the market), then prices must find a higher equilibrium point.
This post was funded by T. Rowe Price
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