Recovery equities manager Hugh Sergeant has claimed the flow of ‘hot money’ out of recovery stocks may have finally dried up.
With equity markets rallying strongly in 2013, recovery stocks such as the ones bought by Mr Sergeant were recipients of ‘hot money’ as investors rushed to such stocks to find high short-term returns in the bull market conditions.
But with choppier trading in 2014, those same investors have rushed for the door, leaving Mr Sergeant’s River & Mercantile World Recovery fund struggling to repeat the remarkable performance of 2013.
From its launch in March 2013 to its peak at the start of April 2014, the fund delivered a return in excess of 55 per cent, outperforming the 10 per cent return of the average fund in the IMA Global sector.
But since then the fund has dropped by nearly 10 per cent, while the sector average is down by just 1 per cent.
Mr Sergeant explained that the fund “performed ahead of expectorations” in its first year, mainly due to the “hot money at the back end of last year and the start of this year going into our favoured stocks”.
That sentiment has changed, and “in the past three or four months people have been getting sceptical and the hot money has gone out”.
In particular Mr Sergeant singled out the UK, where “domestic recovery stocks all overshot on the upside and came back dramatically”.
In spite of lots of money rushing out of Mr Sergeant’s favoured stocks, the R&M World Recovery fund has yet to feel the full force of outflows.
The pace of money flowing into the fund has slowed since the first 13 months of its life, when it rose from £6m in assets to £177m in April.
Despite the drop in performance, inflows have continued and the fund has continued to grow in the past four months, albeit by only £12m.
However, the UK market’s shunning of recovery stocks has adversely affected Mr Sergeant’s other recovery fund, the R&M UK Equity Long Term Recovery fund.
The fund is a member of the Investment Adviser 100 Club of top-performing funds and is in the top decile of the IMA UK All Companies sector in the past three and five years.
But it suffered significant outflows in July, with its assets dropping by 30 per cent to £115m in that month alone.
Mr Sergeant claimed that most of the hot money should have left recovery stocks by now and said the companies should start to be judged on their merits, not as general recovery stocks for eager short-term investors.
He added that the stocks were likely to be “trading sideways” in the third quarter. Investors would not be keen to dive back into such stocks following a difficult few months as money flowed out.
He said the fourth quarter should be “stronger” and that he was hopeful that “you may have the beginning of an interesting move into these stocks”.
Building up the Brics
In a major change of strategy, R&M World Recovery fund manager Hugh Sergeant (pictured) has spent much of this year buying up emerging market stocks.
The majority of these new holdings have come from the Bric economies of Brazil, Russia, India and China.
From having little more than 1 per cent of the fund in these countries at the beginning of 2014, the fund now has 10 per cent of its assets in stocks domiciled in the Brics.
China dominates this weighting, with stocks from the world’s second-largest economy growing from 0 per cent to make up 6 per cent of the fund.
Mr Sergeant said that the Chinese stocks encompassed a “broad spread” of sectors and that he’d largely looked to buy the “market leaders” in various industries. These stocks include rail operator China Railway and brokerage firm Haitong Securities.
The manager has also bought into some Russian stocks “as a result of the geopolitical stress” surrounding the country. The Russian stocks bought have been mainly internet companies, such as Mail.Ru, one of the major internet service providers in the country.
Mr Sergeant said that investing in leading internet stocks when they were unloved by the market had delivered great rewards for him in the past. He cited Facebook as a recent example.
