The Case for Active Investing in 2024

BlackRock, the world's largest asset manager, believes that 2024 will be a year of opportunity for active investing strategies. Despite a challenging macro environment characterized by weaker growth, inflationary pressure, and stubbornly high interest rates, BlackRock argues that quality companies will outperform the market.

Wei Li, BlackRock's global chief investment strategist, emphasized the risks associated with this new environment but also highlighted the greater potential rewards for those who adopt an active and selective approach. Jean Boivin, head of the BlackRock Investment Institute, emphasized the need for investors to actively steer their portfolios through these challenging times.

While it is true that successful active management has been rare according to over 20 years of data from the S&P Indices vs. Active report (Spiva), Tony DeSpirito, BlackRock's global chief investment officer of fundamental equities, remains optimistic. DeSpirito focuses on "bottoms up" analysis, or stock picking, while staying macro-aware. He believes that the market will deliver returns in line with historical averages but sees significant opportunities for outperformance—possibly the most exciting in his 20-year career.

DeSpirito describes the current market as an ever-changing "windshield-wiper market." Last year's focus on energy has shifted to technology this year, demonstrating the dynamic nature of the market. He sees this as a favorable environment for stock picking.

In addition to his role as global chief investment officer, DeSpirito manages the BlackRock Large Cap Value exchange-traded fund (ETF). Since its launch in May, the fund has delivered strong performance, outperforming 98% of its category peers with total returns of 4.4% over the past three months, according to Morningstar.

Overall, BlackRock believes that 2024 presents an ideal opportunity for active investors who can navigate the challenges of the macro environment by selecting quality companies and employing a diligent approach.

The Importance of Quality in Investing

Investing in quality companies is crucial, according to DeSpirito. He emphasizes the significance of prioritizing quality for risk-adjusted returns, except during periods of fast economic acceleration following a recession. Currently, we are not in such a phase, so adding quality and resiliency to investment portfolios becomes even more important.

DeSpirito highlights that when the Federal Reserve stops hiking rates, all stocks perform well, but quality stocks outperform the average ones. Historically, low-beta, quality stocks have proven to be the best performers over one, two, and three years.

But what does this mean for stockpickers? It means identifying profitable businesses with high gross margins and a high return on capital. Stability is also crucial, both in margins and return on capital. Furthermore, having a strong balance sheet goes a long way in protecting against downturns, especially in an environment where interest rates are rising.

Another key aspect to consider is the price. Currently, there is a wide divergence of valuations for various stocks, making it essential to be price-sensitive for protection.

BlackRock highlights that there is approximately $8.3 trillion in money-market funds waiting to be invested. However, keeping cash idle for the long term is detrimental to portfolio performance. Cash tends to underperform equities and bonds, particularly after peak interest rates.

In summary, investing in quality companies, paying attention to stability and price, while actively deploying idle cash, are key strategies for successful investing in the current market environment.