Will Active Management Trump Index Funds in a Volatile Market?

Every January, Bob Doll, senior portfolio manager and chief equity strategist for Nuveen Asset Management, makes 10 predictions about the markets and the economy for the year.

This year brings good news (a recession is unlikely, Doll believes), bad news (it’s difficult to see significant market gains), as well as ugly news (in order to make money, tactical moves may be likely). “When the market’s up, say 15% every year, people can buy the index and ride the wave,” he tells PLANSPONSOR. “But we don’t have that anymore and people will have to work harder”—both as fund managers and as investors.

Market conditions may motivate more plan sponsors to turn to active management strategies, Doll believes, but “managers are going to have to show the results to justify the money coming their way.”

Plan sponsors and advisers will have to pick good managers, Doll says, “managers that have a process that makes good sense and that have some history of outperformance.” But outperformance is just one factor. “You cannot judge on the past three years or just look at past performance.”

Factoring in the manager’s process means weighing several considerations, a combination of manager changes and how the actual process changes. “Is there reason to believe that a process is going to work over time?” Doll points out. “No one can guarantee a one-year return.”

NEXT: Doll’s 10 predictions

Bob Doll’s predictions for 2016 are:

1. U.S. real gross domestic product (GDP) remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row.
2. U.S. Treasury rates rise for a second year, but high yield spreads fall.
3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates.
4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row.
5. Stocks outperform bonds for the fifth consecutive year.
6. Non-U.S. equities outperform domestic equities, while non-U.S. fixed income outperforms domestic fixed income.
7. Information technology, financials and telecommunication services outperform energy, materials and utilities.
8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact.
9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years.
10. Republicans retain the House and the Senate, and capture the White House (as long as Trump is not the nominee).

How accurate are Doll's predictions? He scores his 2015 forecast as a seven out of 10. He incorrectly predicted a 3% growth in U.S. GDP and said U.S. equity mutual funds would show their first significant inflows since 2004. He marked as “half correct” two calls: that U.S. equities would enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rose, and that oil prices would fall and then end the year higher than where they began.