A pair of investment chiefs overseeing $248 billion explain why it’s time to steer clear of a wildly popular investing method — and offer a compelling alternative



Sonal Desi

  • Indexing and other passive investments have become enormously popular in recent years, but Sonal Desai and Ed Perks — a pair of chief investment officers at Franklin Templeton — say active management might be the best approach in today’s market.
  • The two manage a combined $248 billion, and they say simple strategies like indexing look more and more risky as valuations continue to increase. 
  • Desai and Perks said they have serious concerns about the private credit market, pointing to its lack of transparency and the potential for trouble in that market to touch off selling elsewhere.
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Every year, more and more investors use passive investing strategies like index funds to ride along with the market instead of asking someone to help them race ahead of it.

That’s worked out very well in the past decade, thanks in part to the combination of a long, broad rally in stocks and the minimal price tags tied to that style of investing. But with stocks at all-time highs and a series of complex challenges ahead, it could be time for a more nuanced approach.

That’s the argument made by Sonal Desai, the chief investment officer of Franklin Templeton’s $152 billion fixed-income group, and Ed Perks, the CIO for $96 billion Franklin Templeton Multi-Asset Solutions.

“Being an active manager is not in favor right now with end users and clients, but it will probably come back with a bit of a bang,” Desai told Business Insider in an interview.

Perks added: In certain asset classes at certain times, active management will be the primary vehicle with which alpha can be delivered.”

He said that when choosing stocks, he’s emphasizing quality and earnings stability as well as healthy balance sheets.

Read more: ‘This will turn nasty’: A crisis is brewing as a global currency war approaches, and one expert says he’s found the most vulnerable assets traders should avoid

But the concerns of the two CIOs spread well beyond equities. Perks said he’s being especially selective about exposure to the private credit market, which he thinks is more levered than it looks. He also notes that the space has expanded rapidly as wealthy, yield-hungry investors look for bigger returns than they can’t get elsewhere.

But he’s not avoiding those investments entirely, and neither is Desai. The reason is simple: They can’t, because there are so few “screaming buys” left in the market.

It’s the same “get in or get left behind” situation facing investors across the entire market. Emboldened by mostly-strong fundamentals, they’re continuously enticed to take risk because of low and falling interest rates and weak returns from safe assets like bonds.

It’s a conundrum — one made even more sensitive by Desai’s view that turmoil in the private credit market could create contagion and waves of selling in other, more liquid assets. That could bring a lot of pain to heavily indexed stocks, whose share prices are closely tethered to the market’s overall whim.

Desai says managers can help investors balance out these lingering dangers in a way that passive choices like index funds can’t.

“If you’re invested in an entire index against this background there is no doubt that you are picking up too much of everything,” she said. “When you’re buying an index you’re buying it all.”

She added that with stretched valuations and uncertainty around global growth and the health of the market, she’s keeping the duration of her investments short.

“If you do get a crash you want to be paid back,” Desai said. “If you remain relatively short in your duration aspects, it means you will get closer to the point of being paid back in full.”

SEE ALSO: America’s biggest wealth manager for the ultrarich is known for his tailor-made portfolios. He revealed to us his magic formula — and how he saves clients millions on taxes.

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