Macro pressure bears down on stockpickers
Stockpickers have been urged not to abandon their processes as signs emerge of active managers adapting to sentiment-driven market volatility.
The active manager mantra of selecting stocks to perform irrespective of macroeconomics appears to be facing challenges, as macro events play heavily on investors’ minds and monetary policy distorts market behaviour.
The dip that marked the opening weeks of 2016 was widely attributed to the triumph of sentiment over fundamentals, and saw the FTSE 100 index fall by more than 10 per cent to mid-February.
Some managers, including Bibiana Carretero, who runs the New Capital Dynamic European Equity fund, are now putting greater emphasis on sentiment, in her case via a focus on industrials.
“Higher beta has been rewarded by the market, and sentiment rather than fundamentals is driving [it],” Ms Carretero said.
“I have been paying closer attention to macro events and political events. I have been trying to increase the beta of my portfolio, and have stocks with growth that will benefit from improvements in the capex cycle and political sentiment.
“There are 20 to 25 key political events over the next year or so, such as the referendum in Italy and elections in France and Germany,” she added.
Neil Veitch, of the SVM UK Opportunities fund, said that he had been fully invested since the EU referendum outcome in expectation that “irrational” sentiment would lift his portfolio.
“We are primarily bottom-up focused but in a quantitative easing-driven world and with policy easing we have to be cognisant of those macro events,” he said.
“You shouldn’t let the tail wag the dog, but we are pretty much fully invested, because I think the path of least resistance for equities is higher. It’s a rational asset in an irrational world.”
However, some selectors have warned of the risk in overvaluing sentiment. Quilter Cheviot’s Ben Mountain has been shifting his portfolio in order to avoid excessive beta (see page 16). Likewise, Hawksmoor senior fund manager Ben Conway criticised the moves and said sentiment tended to be only a short-term factor.
“If you want to be driven by sentiment you need to know what it is going to be. A lot of ways to work out sentiment are quantitative, which doesn’t suit our style,” he said.
Meena Lakshmanan, partner at Vestra Wealth, warned that “style drift” could be problematic for fund buyers, adding: “It makes it difficult to monitor a fund manager and to use it in portfolios.”
However, Ms Lakshmanan and other fund selectors had noticed no change in investment strategies thus far.
“The fund managers we speak to continue to be more focused on how the policies affect fundamentals of businesses, rather than second-guessing short-term sentiment,” Whitechurch Securities managing director Gavin Haynes said.
Gill Hutchison, head of investment research at City Financial, claimed manager behaviour had been mixed in recent months.
“Managers are having to think about their exposure to international earners, emerging market plays, domestic plays, commodities and bond proxies, but also withdrawing to the companies in which they have greatest conviction,” Ms Hutchison said.
Key Numbers
SVM’s Neil Veitch increased his fund’s exposure by 15pp to take advantage of market beta following the EU vote. The FTSE 100 had previously fallen 11% from the start of the year to February 11.
