Interest Rates & Active Management’s Outlook

Nomura

Joseph Mezrich, Yasushi Ishikawa

Research

13 Pages

Nomura examines how interest rate trends may influence active equity manager performance and whether rising rates could improve conditions for active investing. Drawing on data since 1962, the paper argues active alpha has historically fared better in rising rate environments and links this relationship to small caps and market breadth.

Key Takeaways

Rate Direction Matters: From 1962 to 2013, active funds historically generated higher average excess returns in rising rate environments than in falling rate environments.
Small Cap Tailwind: During 1962 to 1999, active managers benefited when small caps outperformed, with the small cap premium serving as a major source of alpha.
Market Breadth Link: Since 1962, monthly changes in market diversity and the small cap premium showed a 0.5 correlation, suggesting broader opportunity sets for active managers.
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