(Bloomberg) — Don’t be fooled by the stock market’s rapid-fire reaction to the news. It’s just the beginning of the first real slog in years, one that will hand a comeuppance to passive investors who once thought the only way for prices to go was up.
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That’s the view of James Abate, whose Centre American Select Equity Fund (DHAMX) has beaten 97% of its peers during the past three years according to data compiled by Bloomberg.
He says shares are getting less valuable due to rising interest rates and geopolitical angst. One possible outcome, as he sees it: a stock market that goes sideways for a year or more, swinging between spells of gains and losses.
“I’m of the belief that we’re in the midst of a ‘time correction,’ where the market is still having to digest a transition away from a disinflationary, low-interest rate, low-risk premium type of environment,” Abate, 56, said in an interview. “If you are a momentum trader or a passive investor, it’s going to be a period of maximum frustration.”
After peaking out on the first day of trading, the S&P 500 has fallen as much as 13%, marking one of the longest stretches of the past decade in which the market has dropped without bouncing back to a new record high. The last time the index spent more than a year without making a fresh peak was during the 2015-2016 oil crisis.
Abate’s $300 million fund has returned 13% this year, in part thanks to a hedging position the firm added at the end of last year through put options on the Nasdaq 100. After taking profits on the trade in January, the fund has shied away from rolling out new hedges.
The performance stands out in a year when many actively managed funds have struggled to navigate the latest bout of market turbulence.
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Read more: Active Funds Get Crushed After Falling in Love With Their Hedges
The way Abate sees it, placing a proper price-earnings multiple on the broad market is getting tricky. With 10-year Treasury yields spiking, the S&P 500’s earnings yield — a reciprocal of its P/E ratio — has seen its…
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