Active management in an AI-driven market

Where do you believe active management has the greatest potential?

Nogueira: We believe active management is highly attractive in today’s environment for two reasons.

First, innovations in AI have resulted in a historic capital expenditure cycle and a technological revolution. In this environment, the market is trending toward elevated stock dispersion with outsized winners and losers. Skilled active managers can benefit from periods of disruption and dispersion—periods like the one we are in.

Second, we are witnessing significant changes in market structure, ranging from participants (such as retail investors and short-term-focused hedge funds) to vehicles (such as options, levered ETFs, and thematic ETFs). We believe long-term-focused investors like T. Rowe Price and Vanguard can benefit from the greater short-term volatility and inefficiency caused by these changes.

We believe that active management has the greatest potential in areas where dispersion is rising. That environment can create a wider gap between companies that convert investment into durable earnings growth and companies whose spending pressures free cash flow. This is precisely where security selection can matter. We believe the best opportunities are in areas where fundamentals are diverging: small- and mid-capitalization stocks, select value and cyclical sectors, infrastructure, and industrial beneficiaries of AI-related capital spending.

How do you stay focused on long-term outcomes in an environment that can be driven by short-term noise?

Corris: We are not trying to outmaneuver short-term investors whose focus is predicting the next quarter. Instead, we are committed to our tried-and-true beliefs about the value of high-quality companies with sustainable growth and competitive moats at reasonable valuations. We believe a long-term time horizon is a source of advantage in this market.

Our discipline starts with separating price movement from business value. Short-term markets can be dominated by macroeconomic headlines, positioning, rates, election cycles, earnings revisions, or investor sentiment, but long-term outcomes usually depend on whether a company can compound earnings and cash flows with attractive returns on capital.

Every element of the firm’s model—including our research approach, investment debate focus, portfolio construction, and incentive system—is aligned to focus on the long term. The intentional creation of processes across each dimension of our model is critical to remaining disciplined and focused on the long term in volatile markets.

Risk management also plays a key role: Focusing on the long term means being deliberate about which risks are worth taking. It does not mean ignoring risk altogether. The goal is to keep capital aligned with our highest-conviction, long-term opportunities while limiting significant downside risk.

Thoughtful risk management is one of the common strengths that both the Integrated Equity Strategy and the U.S. Structured Research Equity Strategy share. This element has been particularly helpful in navigating the unique market environment over the past five years.