Touts tapering, active management; says advisers will narrow use of ETFs
The federal government's last-minute budget deal just adds to the uncertainty in the financial markets, said Chris Wallis, chief executive and chief investment officer at asset management firm Vaughan Nelson.
InvestmentNews: How do you feel about the Washington budget deal reached last week?
Mr. Wallis: I think it is neutral right now because we haven't made any significant shifts from current policy, and we haven't come to a long-term or medium-term resolution. They only established parameters for the next stage of talks. The next discussion we have — and the resolution to the budget — could be more important. We just went through a circus.
InvestmentNews: Does the budget deal open or close any investment opportunities?
Mr. Wallis: I don't think it does, only because the deal wasn't a material change from what already was in place, and we haven't seen any radical shifts in the regulatory environment.
As time passes and we go through the implementation of the Affordable Care Act, that will have an impact on certain markets for a number of years.
InvestmentNews: What is your fourth-quarter outlook for the markets?
Mr. Wallis: This has been the toughest quarter to call yet. When we look at the data, we're not seeing anything that would indicate the economy is getting ready to re-accelerate. The cycle is so muted. We would expect the fourth quarter to mimic what we've seen to date. Don't expect the Federal Reserve to begin to taper. So without that withdrawal of liquidity, we could be up or down 5%.
InvestmentNews: Where are the biggest risks in the markets?
Mr. Wallis: The single biggest risk is the Fed; that is, the systemic risk. It was a mistake to not taper the quantitative-easing program. We had already suffered the [implicit] impact of beginning to taper. The markets adjusted to it, but we needed to follow through and actually begin to taper. The private capital will not come back to the markets until the Fed gets out of the way.
If we started to taper today, the benefit 12 to 18 months forward would far outweigh the benefits of quantitative easing. It is going to be much more difficult to taper a year from now. Quantitative easing is a very poor tool for trying to achieve the objectives sought by the Federal Reserve.
InvestmentNews: What is your outlook for active versus passive management in this market environment?
Mr. Wallis: Clearly active management is going to do much better over next three years versus the past three years. We've been through a general recovery in economic activity, earnings and valuations.
Most of the monetary policy was designed to support that. All assets have risen generally across all segments of equity markets. The markets will begin this churning process where some will benefit and others won't, versus the past three years when everything benefited.
It will be very much a rifle shot in terms of generating the high-single-digit returns people are expecting out of the equity markets. I think we'll see advisers continue to narrow their use of [exchange-traded funds].
