Simon Blanchflower CFA from Altrinsic Global Advisors was in New Zealand to speak to the SiFA conference this week, and attended lunches with advisers in other parts of the country.

He said equities were not near the bubble territories seen during previous market peaks, but his firm was increasingly concerned about vulnerabilities and the mispricing of risk in markets.

Risk indicators looked worrying with bond yields and option implied volatilities near record lows, he said.

“We are starting to see volatility creep in. We’ve been through a phase where the risk premium was getting very tight. In 2006, no one cared about risk and it was almost the same a month or so ago.”

He said although things had improved slightly, there were still concerns risk wasn’t being priced appropriately, considering international headwinds such as the possibility of deflation.

“It’s more an issue for US equities than most other places… As margins are elevated, top line growth is key to sustain valuations particularly in the US.”

Equities had had a great run over the last few years on the bank of unconventional monetary policy, he said, but the key message for advisers and their  clients was that active management would start to pay off more in the coming years.

“If you went passive over the past few years you could be forgiven but now given the risks around equity pricing alpha is going to become a greater component of returns.”

He acknowledged some active managers had struggled to perform net of fees.

But he said active management would likely differentiate itself from its passive counterpart in the current investment environment. “Active hasn’t been as productive as it could have been in the last couple of years but that may not be the same going forward.”

He said a margin of safety in stock selection was as important as ever in the current investment environment. “Stock selection will be an important source of return going forward.”

Blanchflower said his firm was significantly underweight in European banks and overweight Japanese financials. It had 17% exposure in Japan and was overweight healthcare companies.