A bowlful of top stocks for wealth managers; Two years of being outfoxed by the Fangs
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Super bowl
From Brics to Fangs, investment bank analysts have always stood ready to fly the flag for acronym-based investing. And however reverse-engineered the moniker may be, the US tech stocks that make up the Fangs are continuing to do the job for investors this year.
Refusing to rest on its laurels, Goldman Sachs last week debuted its latest effort: the ‘Granolas’. It's tipped these 11 European stocks to be the continent’s own group of relative winners, courtesy of their strong balance sheets, low volatility growth and dividend yields of 2-2.5 per cent.
For wealth managers, Europe is still far from the flavour of the month. But many of their fund preferences in the region do have a taste for the concept.
Excluding the two UK stocks in the Granolas – AstraZeneca and GSK - we’ve examined how DFMs’ favourite European equity funds view the others: Roche, ASML, Nestle, Novartis, Sanofi, Novo Nordisk, L’Oreal, LVMH and SAP.
The results are split down the middle. Three funds – Crux European Special Situations, Jupiter European, and Miton European Opps – have a slightly different mindset in terms of the type of stock they favour. All have less than 10 per cent of their portfolio in the Granolas.
But four other favourites – BlackRock European Dynamic, JOHCM Continental European, Threadneedle European Select and Man GLG Continental European Growth – hold an average of 27 per cent of their funds in these shares. The concept may have only just been given a name, but many European equity managers have long since bought into the strategy.
One caveat is that one of the Granolas’ touted qualities – their dividend yields – hasn’t been enough to attract equity income managers in their droves. European equity income isn’t a big hunting ground for DFMs, but their handful of favourites in this area are less likely to favour non-Granola shares than DFMs' growth picks. And it remains to be seen whether income funds will recalibrate away from higher-yielding positions in the coming months.
Uphill battle
Active managers’ struggles to take advantage of US tech’s runaway success need little further explanation here. Their relative inability to overweight such stocks continues to garner plenty of attention, as do bi-annual performance figures showing just how few US funds have managed to beat their index.
This difficulty shows the limits of received wisdom on active management, which suggests that when stock dispersion is high, active managers stand a better chance of outperforming. While the difference between US tech and the rest of the market has been pronounced this year, the winners are so apparent, and concentrated in such small numbers, that it’s been tough to find an edge.
For fund selectors, the problem is compounded by the dominance of US large caps. Active managers tend to outperform more often in areas like EM equity and US small caps, according to recent Morgan Stanley research. But that’s of little use when the global index is being propped up by mega-cap companies across the Atlantic.
There have been signs of late that value stocks aren’t completely dead and buried, as we discussed last week. The end of April brought a brief but notable period of outperformance for these shares. But the fundamental problem for those seeking equity diversification is that underweighting the US brings with it a sizeable amount of career risk. That’s been an issue for allocators for at least two years. Now as then, it will take a brave investor to start ratcheting up EM, European or UK exposure at the expense of the world’s biggest equity market.
Shock to the system
Are asset managers systemically important? It’s a question that’s been floating around policymaking circles for the past five years at least. The debate has long since been settled in the minds of some policymakers, even if there’s been little in the way of concrete action as a result.
Asset managers themselves tend to disagree. But 2020 has thus far seen central banks inject almost $100bn to prop up investment funds and safeguard market liquidity. Support has ranged from efforts in Thailand and India to the Fed’s own efforts to aid money market funds and protect credit markets. Fund managers say these initiatives have been means to an end: the aim is to unlock underlying markets, not support funds themselves.
Ratings agencies, however, have taken a different view. Their more sceptical stance is increasingly common, whatever its rights and wrongs. That suggests asset managers will face ever-closer scrutiny once the latest crisis eventually fades away.
